Since the 90s, many of the world’s biggest and most international cities have flourished through a period of unquestionable growth. An ever-growing, white-collar workforce triggered the need for more offices in almost every major city. Fast-forward to today and market observers are more wary, querying whether the trend will continue, given hybrid work’s pronounced effect on the perception of the importance of office space.
Now, the question is how this seismic shift in working styles will affect the future growth of cities.
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Connecting the fate of cities with the office sector is logical. They have helped transform areas that were once perceived as industrial zones into much cleaner, safer, service-led districts. However, the current focus on the office sector as a driver of cities is too one-sided. Population growth, wealth increase, and an expanding retail and services industry — which has been a magnetic force in driving people towards city living — have also contributed to cities’ growth over the past decades.
Long live the office
There has always been competition for space in the best locations, with uses proving most profitable — and therefore able to pay the most per square metre — securing prime locations. Offices have long featured in this category and this is unlikely to change. Even though the sector faces fierce competition from industrial, residential and newer alternative assets, the office sector is increasingly focused on prime areas. Office occupiers want space that is well-designed, well-located and accessible. Several sectors, such as technology, pharma and parts of professional services, are still driving the take-up of prime office space and are expected to continue growing.
Beyond the want for quality space is the growing consideration of sustainability. If an organisation’s real-estate footprint can play a part in meeting environmental, social and governance objectives, then occupiers are willing and able to pay premium rents.
Property company CBRE’s 2023 European Office Occupier Sentiment Survey found that 45% of occupiers are already relocating to better-quality space as part of their portfolio optimisation strategy, with an additional 23% exploring this as a possibility. The same survey found that sustainability is driving building selection, with 55% of respondents identifying it as the most sought-after feature when choosing buildings.
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Building more diverse cities
Nevertheless, change is coming in areas where locations and buildings cannot offer that quality. Those offices that cannot evolve to facilitate new ways of working or do not meet environmental credentials (either from an occupier or regulatory perspective) are at risk of obsolescence. This has sparked some concerns about whether certain city centres will return to the situation witnessed in the 1980s and 1990s, when growing crime rates and economic decay prompted people to leave urban centres.
But what is different today is that city living is in great demand and adequate housing is scarce in volume. With that, efforts are underway to identify how potential obsolete offices can be transitioned into residential units. Higher interest rates and changing rental regulations complicate this, but with the former set to stabilise, this situation is likely to improve soon.
Market values for buildings that need a change of use will adapt accordingly, and this will provide opportunities for sectors of the economy that were previously pushed out of cities to return. Meanwhile, global phenomena such as the road to net-zero, hybrid-work, and a more sophisticated client — be it the experience-loving retail customer or employees accustomed to evolved approaches to office-based work — will lead to further investment in building stock in urban areas. All of this is supportive in maintaining diverse and well-running cities.
Jos Tromp is global head of data intelligence and head of continental European research at CBRE