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De-Densification and the New Metrics of the Office

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In evolutionary biology, there is a theory called ‘punctuated equilibrium.’ It holds that instead of slowly evolving over time, evolutionary changes happen rapidly and suddenly. Species split into two distinct species, rather than one species gradually transforming into another.

In a less dramatic but, I believe, equally transformational way, this is where we are in the world of work and the office. The way things were last February must now be considered history. Everything has changed. However long it takes to get through the current pandemic, we are not going to return to the world as it was.

And, hard though it may be to believe right now, that is a good thing. We have an opportunity to do things we thought were not possible.

Two zeitgeist changing things have occurred. First, we have been forced to realize that being inside, in confined spaces, with many other people, potentially exposes each and every one of us to illness or worse. Being indoors can harm us.

Secondly, across the globe, we have been part of the largest behavioral experiment in history. In a matter of days, the knowledge economy went from being 95 percent office-based to being 95 percent home-based. And the results of this experiment? With caveats, working from home works. 

I believe these two factors will be the drivers behind fundamental change within the office industry. 

Now that we are in sight of a widespread return to the office due to the increasingly rapid rollout of vaccines, we are reaching crunch time as companies. What are we going to be doing about our real estate? I doubt there is a company in existence that is not asking itself this fundamental question. I also doubt there are many with a fully formed answer. Because it is difficult to know. 

First off, we are all aware that we need to ensure we invite our people back to spaces that cater to their health & wellbeing. And secondly, we know that, to a lesser or greater extent, our companies have largely functioned without us being in the office. According to data from Leesman (probably the best and most comprehensive on working from home), roughly 70 percent of people have found not being in the office neutral or positive to their productivity. For the 30 percent, this is very much not the case. It varies between companies and individuals but we are now pretty aware of what works where. 

So we need to rethink the purpose of the office. What is it for? What is its role? Where does a physical office fit into the culture and workflows of a company in the 2020s? What is the value proposition of an office?

Now both of these things we knew before. We have known about the impact of environmental conditions for a very long time. But largely, we have ignored the issue and today we no longer can. And we have also known (if we bothered to look) that historically offices have performed terribly. Ask people whether their office enables them to be productive and about half will say no (see Leesman again for data on this). And ask Gensler (who surveyed this globally each year) what the average occupancy rate in an office is and they will tell you circa 40 to 50 percent. So our customers are not that keen on the offices they occupy and don’t actually use them that much. On average. 

It is genuinely a wonder that customers have not rebelled harder against the real estate they are sold or let earlier. What is bad (or a major plus depending on who you are) for our industry is that now they know they don’t actually need an office. They have operated fine without them. As an industry, we desperately need to work out how we can make our customers want an office.

And this is why I think we are at a turning point. A point of ‘punctured equilibrium.’ The market is going to bifurcate like never before. 

Tale of two organizations

Let us take the comments of two large investors to demonstrate this.

The first is from Stephen Bird, CEO of UK investor Standard Life Aberdeen, with 4,500 employees: 

“You cannot change the world from home. It’s an absolute falsehood. It’s lazy thinking, it lacks courage and it’s delinquent on the next generation.”

Bird expects the entire workforce to return to the office. Compare this to the approach of global asset management firm Schroders, with 2,200 employees, who is not requiring their team to return to the office after the pandemic. Their human resources boss Emma Holden said: 

“Rethinking the rulebook on flexibility will ultimately prove a huge shot in the arm for productivity in the long term.”

Given their positions, these two companies are going to take entirely different approaches to their real estate. Are they going to fail or succeed in lockstep? Absolutely not. Are they going to attract different talents? Absolutely yes. Where does the real estate industry sit with each? I’d say in one case as a supplier and in the other as a partner.

This gives you some idea of just how much office life post-pandemic will change vis a vis pre-pandemic. In some cases not very much, if at all. But in others, the rules of the game are being rewritten. And in these cases, the metrics, the scorecard, needs to and will change as well. Let’s focus on this new scorecard.

But first of all, I think we just need to zoom out a bit. 

Because I think the workplace actually has a problem beyond that made plain by the pandemic. And it has a problem in three main areas. 

It has a problem in the area of unaligned incentives, a problem in the area of lack of data, and a problem in the area of organizational silos. 

We’ll start with the problems of unaligned incentives. 

The trouble is you have got landlords, occupiers, and property managers, each with incentives that go in a different direction. So the landlord just wants the highest rent possible with the lowest costs and requiring the minimum effort. 

Then we have the occupiers. They want the lowest rent, but they also want flexibility and they want the highest level of service. 

And lastly the property managers. Well, they are sort of stuck in the middle. What ‘they’ really want is to have some pricing power, to not be commoditized, which is very much the situation in property management at the moment. 

Who’s office is it anyway?

So you’ve got three stakeholders, with completely unaligned incentives. 

This ‘landlord-tenant dilemma,’ with the property managers trying to be the neutral party in the middle, is a well-known issue in the office market, and very much a consequence of the way we transact via leases. It is so easy for there to be a financial disconnect between those responsible for paying the capital expenditure for operational upgrades and those who benefit from them.

When we look at how the office market is routinely structured it is really no surprise that each party continually feels aggrieved with the others. The conflict of interests means that buildings are underinvested in. Maintaining an up-to-date stock, utilizing the most advanced labor and cost-saving technology, and setting and stretching sustainability goals is nigh on impossible with how the industry is structurally configured. The three or five-year rent review process itself is like mutually agreeing to have a heated argument periodically. 

The misalignment of incentives is, using a tech term, a very serious bug.

If you look at what this means for a building’s data, you’ll find that everyone collects some data but few collect everything that’s needed. Not enough thought has been put into what data building systems really need to collect. Mostly you will find that the data collected is all over the place, some of it is over here, and some of it is over there, yet none of it is that useful on its own. When it comes to real estate data, there is not enough of it, it is not well enough thought out, and it is not properly stored and maintained. 

And then you’ve got organizational silos. In my mind, creating a great workplace requires the skills of what are, today, six different industries. First and foremost you need people with real estate knowledge. Then you need people with IT knowledge and Internet of Things and network knowledge. You need data analysts and you need HR people. Plus, on top of all of that, you need people with hospitality skills and workplace skills. So you’ve got six individual industries, each with their own incentives that need to be combined to create a really good workplace. This is why historically offices have performed so badly. Creating a great workplace is extremely hard within the context of how the industry is configured. 

But we are now approaching the stage where we cannot ignore these problems anymore. Because the fundamental point here is that within the real estate industry, we think of ‘offices.’ This is all a bit of a category error. Because everyone thinks that they are creating offices, they think that all their customer is after is offices. 

There is a great quote by marketer and blogger Seth Godin that says, “People do not buy goods and services. They buy relations, stories, and magic.” No business actually wants an office. What they want is the best outcome for the office. What they want is a productive workforce. They want a creative workforce. They want a happy and healthy workforce. That is the story, that is the magic. It is exactly the same as manufacturers of household drills. Nobody wants a drill. What they want is a hole in the wall. 

No business actually wants an office. What they want is the best outcome for the office.

So what if you made improving the productivity of people, the core value proposition within the office? What if we stopped thinking about space, and started thinking about improving the productivity of people? What if that was our offer to customers?

Years ago, the World Green Building Council reported that on average one percent of the cost of running an office building goes to utilities, nine percent goes to rental costs, and a full 90 percent goes to the people working in that space. So clearly, you make less of an impact optimizing the one percent, the costs, by a lot than you do by optimizing the 90 percent, the people, just a little. Right now within the real estate industry, we really do focus on the one percent, and the nine percent. And historically, we really haven’t paid much attention, at all, to the 90. 

This needs to change.

Because the real estate industry is really no longer about real estate. Of course, it is still about real estate but that is now necessary, but not sufficient.

Instead, buildings need to think of themselves less as places to work and more like work coaches. Sports teams long ago realized the value in focusing on every aspect of the players, not just the management of the game. 

One person who agrees that offices will likely go the route of sports teams is Lee Butz, co-founder of the tenant engagement app District.  “There used to just be one coach for each team but now there are fifteen or twenty,” she said. “They have a coach for fitness, one for diet, one for sleep. Companies are going through the same transformation and so they will want a coach for their productivity and offices are probably the best candidate to do so.”

Those six individual industries we discussed above need to be taken out of their silos and combined into one coherent industry, one that will pull together skills, aggregate data, and start from improving the productivity of people being the core value proposition.

For that, it will need new metrics. We need to ask what are the key variables we need to be able to improve the productivity of people within our office buildings. This becomes complicated and detailed. When our customers needed our product, we did not have to bother too much with their user experience (or as designers like to write it UX). But now, as we approach a post-pandemic world, the office real estate industry is tasked with the job of creating desire not matching demand. Companies need to be given reasons to occupy our offices. Are they going to enable our people to be as productive as they can be? Are they safe and healthy places to be? If not, then why should we bother? We might as well just say our goodbyes now and move along.

Win, or go work from home

Whoever is able to create and curate great workplaces is going to be the winner in the future. That capability is going to require data, and human skills, at a level rarely seen to date in the industry. There is a huge market opening up which currently has few ‘full stack’ suppliers. Below I highlight the base level of data that is going to be required to fulfill the brief.

Starting with quantitative, objective data is absolutely key, especially in a post-pandemic world. This means that we need to have at the very least a good understanding of environmental conditions. The big four are temperature, air quality, noise, and lighting. The importance of air quality on this list means that we need the ways and means to track particulate matter, carbon dioxide and carbon monoxide levels, total volatile organic compounds, and humidity. These are the most important environmental factors that need to be measured in real-time and at a very granular level. 

Across the workplace, also at a very granular level, we need to know: What space is being used, at what time, by what teams and in what location? What is the space to desk ratio? Then we need to, at the facilities services level, check things like helpdesk requests: How many are received and in what categories? Meeting room availability: What is the vacancy ratio by room? Front desk performance: What is the speed of visitor processing and how quickly do we get people into our buildings? Hospitality scores: How welcoming is the reception they get when someone comes into a building?

We also need to measure some factors to give us an understanding of health and well-being. Like the number of sick days taken? How many health complaints do we get within the building? How many workplace accidents do we get? What is the staff turnover? 

Harvard Professor John Macomber thinks that this will require buildings to record and share a new list of performance indicators: “Healthier buildings will be able to show their value to occupants in a very empirical way,” he said. “People are tuned in now so I wouldn’t be surprised if they started to ask for data around air exchange, volatile compounds and CO2 in the air, and an average number of sick days from their buildings.” 

Healthier buildings will be able to show their value to occupants in a very empirical way.

John Macomber, Senior Lecturer at Harvard Business School

This is where you have to start working with HR. Since usually only human resource departments have access to this kind of sensitive data, unfortunately, it rarely gets incorporated into quantitative studies. A lot of the time you don’t really understand how well space is performing because you just do not have access to this level of data. 

Then you have to acquire qualitative data. This can be much harder to capture than just adding sensors. It’s subjective and it is derived by actually asking people how they feel. Is the temperature comfortable? Is the noise level okay? How is the air quality? Do they have good lighting? What is the quality of the decor? Is the space tidy enough for their liking? The hardest part is that we need to know this for everybody because we need to hone in on really understanding the needs of individuals. Perception is reality so expecting everyone to experience a workplace in the same way is overly simplistic.

There are also many qualitative data points in terms of FM services. People like to feel that they have control over their personal environment. Do they have that? How easy is it to book meeting rooms? Can they move their workstations depending on the needs of the day/hour? Are they able to adjust the lighting or temperature? Can they make service requests on their own or do they need to go through the building team?

It is vital that people have the equipment they need to do their job, but also that they can access the right spaces in which to do it. So you need to ask people, do you have the right space? For the personal meetings you have? For heads-down work? For creative thinking? Even, for relaxing?

There is a great deal of research about the impact of environmental conditions on cognitive function. Many peer-reviewed papers exist about this. It is not a subjective question about “Can a workplace enable you to be more productive?” A workplace can be operated in such a way that it performs as well as it is capable of performing, for anyone and any tasks. 

Because we know if a space is too hot or too cold, or has carbon dioxide levels that are too high, or is too noisy, or has poor lighting, or is too humid, or not humid enough, the effect will be that the occupiers of that space will have their cognitive functions impaired. That will, undoubtedly, reduce their productivity and, therefore, make the office less valuable. Get these environmental factors right and we know we can help enable people to be as productive as they are capable of being.

It should be said that there is only so much a workspace can do. We cannot make a bad company good by putting a bad company in a great workplace. But we can make a great company better by putting them in a great workplace. Because the point here is really understanding the conditions. What are the best conditions that this space can offer? How can buildings provide measuring and monitoring and optimizing services on an ongoing basis to provide the best environmental conditions for the tasks that people have to do?

We cannot make a bad company good by putting a bad company in a great workplace. But we can make a great company better by putting them in a great workplace.

So to sum it all up, what we’re really looking at is how do we understand how our building is performing? The first step, of course, is to understand how our building is being used by its occupiers and visitors and what their metrics for performance are. Then, through really in-depth, granular and often real-time data can a building change in order to meet these dynamic customer needs? 

What will this office look like? We don’t know, and that’s the point. But what we do know is that the metrics for the office are changing. We have reached a punctuated equilibrium where tenants are no longer solely interested in density and price per square foot. Instead, they are thinking about more subjective qualities like productivity, creativity, and culture. To move into this new world, buildings will have to change as much as our workweek has. This switch will not be easy but offices will not have a choice. If nature has taught us anything there are only two types of organisms, ones that evolve and ones that perish. It is time for the office industry to figure out which one they want to be.

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