💼 Beyond the Office: Shaping Tomorrow's Workspaces

Hello everyone👋,

In today's edition of Bold Efforts, we explore the changing landscape of office spaces.

We'll begin by delving into why offices remain a favorite among real estate investors. Next, we'll examine the four waves that have driven the evolution of modern offices in the last three decades.

Let's get to it.

Top reads of the week

Curated news, articles, and opinion-pieces about the future of work and living just for you:

1. CNBC: Move over, remote jobs. CEOs say borderless talent is the future of tech work

• Borderless hiring for technology jobs is stealing the conversation from remote work.

• Global hiring is an example of a luxury that’s moving down the value chain.

2. The Guardian: ‘The new normal’: work from home is here to stay, US data shows

• WFH decreased quit rates by 35% and this is increasing shareholder profits.

• Every person who quits can cost firms ~$20,000 because they’ve got to go out and advertise the post, have multiple rounds of interviews, get the person in, train them and have them slow for the first six months.

3. CNN: Work from home could lead to more homes in vacant offices

• Nearly 70 million square feet of office space, or 1.7% of the total US supply, was in the process of being converted for other uses in the first three months of 2024, according to a recent report from commercial real estate firm CBRE.

• 63% of those conversions are expected to be into multi-family housing.

Beyond the Office: Shaping Tomorrow's Workspaces

Office buildings are the cornerstone of portfolios for many of the world's largest real estate investors, with the global investment in this segment reaching an impressive $12 trillion. This dominance is evident in the makeup of Real Estate Investment Trusts (REITs), where offices play a critical role due to their historically predictable returns.

The allure of office spaces lies in their ability to provide stable income. Unlike other asset classes like residential or hotels, office buildings traditionally benefit from long-term anchor corporate tenants, ensuring a consistent net operating income and predictable revenue streams. This stability makes them an attractive option for investors seeking reliable returns.

Moreover, office spaces offer remarkable flexibility. They are fungible, meaning tenants can be easily replaced without significant disruption. This fungibility extends to office operators as well, simplifying the management and leasing processes. This flexibility enhances the appeal of office investments, making them a preferred choice for real estate professionals.

High-quality office buildings are particularly favored by institutional investors, thanks to their ability to generate bond-like returns. These properties are seen as safe and lucrative investments, providing both security and profitability.

In essence, the office sector's ability to offer stable income, flexibility, and reliable returns makes it a go-to investment for many in the real estate industry. The significant global investment in offices underscores their critical role in the portfolios of leading investors, cementing their status as a cornerstone of corporate real estate.

However, this dynamic is changing due to the evolution of work. As remote and distributed work models gain popularity, investors are now compelling their corporate tenants to implement mandates such as returning to the office for a minimum of three days a week to maintain the value and utilization of these office spaces.

A Deloitte report highlighted that in the US offices have so far notched the largest value declines since commercial property values peaked in early 2022, falling by 20.2%.

For landlords, predicting the number of stable office jobs is becoming increasingly challenging. Additionally, the demand for a one-size-fits-all office product is dwindling, making it less likely to be in high demand in the future.

It's essential to realize that offices are a relatively recent phenomenon, even if we might think they have been here forever. The first ever office, the East India House, was built in 1729 on Leadenhall Street in London as the headquarters from which the East India Company administered its Indian colonial possessions. However, the traditional office-setup started to get challenged in the mid 1990s after the advent of internet and other emerging technologies.

Let's explore the four waves that illustrate the evolution of the modern office:

• Wave 1: Jay Chiat and the Open Office Experiment

• Wave 2: The University-Themed Googleplex Office

• Wave 3: WeWork and the Rise of Flexible Workspaces

• Wave 4: The Offices of 2024 and Beyond

Wave 1: Jay Chiat and the Open Office Experiment

Let's start with a quick story about a fellow named Jay Chiat.

Jay Chiat, an American advertising mogul, co-founded an advertising agency in Los Angeles in 1968. The agency's client roster included giants like Apple Computer, Nike, Energizer, Nissan, Infiniti, American Express, and Reebok.

Chiat is perhaps best known for the iconic 1984 Apple Computer campaign. The "1984” Apple spot during Super Bowl XVIII is often credited with turning Super Bowl commercials into a major cultural event. Fun fact: This ad was recently referenced in the movie Inside Out 2.

In the mid-1990s, Jay Chiat embarked on one of the first significant attempts to create a virtual office environment for his employees. Reflecting on his efforts, Chiat remarked, "The only thing I ever did in business that I was satisfied with."

His vision was a bold experiment in designing the office of the future: there were no offices, no desks, no personal equipment. This workplace experiment was founded in response to the rise of the internet and the technological revolution. Employees would enter the office, leave their personal belongings in lockers, and check out a phone and laptop for the day. They’d grab a spot on an open couch or at a table in the café. The space was colorful, and the experience was open; oftentimes, this proved to be a culture shock for people coming from a traditional work environment.

Chiat's innovative office was housed in the Frank Gehry-designed binocular-shaped building in Los Angeles. The innovative and futuristic idea of a virtual office was certainly ahead of its time. However, it proved to be too much of a change. Many complained that it suppressed the creative process and resulted in too many distractions.

Five years after its inception, the employees of this advertising agency finally left the office, moving to new premises. Ultimately, Jay Chiat's "virtual office"—the work-from-anywhere workplace for the knowledge workers of tomorrow—was officially pronounced dead. Despite its failure, Chiat's attempt was ahead of its time, laying the groundwork for future explorations into the possibilities of remote and flexible work environments.

Eventually, the firm moved back to a traditional office format. However, the idea of the open office lived on, eventually proving to be the ideal choice for none other than Google.

Wave 2: The University-Themed Googleplex Office

In 2004, Google enlisted designer Clive Wilkinson to create one of the most iconic office environments. Co-founders Larry Page and Sergey Brin explained, "We don't really have any reference point but the Stanford campus model." Inspired by this, they developed a unique office environment in Mountain View, California.

The Googleplex featured a maze of well-lit nooks, bleachers, and clubhouse rooms designed to encourage collaboration and creativity. It became famous for its amenities: gourmet meals, fitness classes, organic gardens, massage rooms, laundry services, private parks, volleyball courts, swimming pools, and more. These perks were meant to keep employees happy, healthy, and productive.

Wilkinson believed that blurring the line between work and non-work kept employees tethered to the office, benefiting the employer most of all. With everything provided on campus, employees had little reason to leave for local cafes, restaurants, or grocery stores, ensuring they were always nearby to collaborate and innovate.

The university-themed design offered a variety of experiences throughout the workplace. Instead of just a desk, lunchroom, and conference space, the Googleplex boasted thirteen different settings. “In a university environment, you typically have the option of self-directed work, a selection of work styles or work environments, independent study subject choices, either private or within a group,” Wilkinson explained in an interview.

This educational environment included formal lecture and “tech talk” areas and an abundance of whiteboards for impromptu problem-solving and discussions. The goal was to create a dynamic and stimulating environment where creativity and collaboration could thrive.

But, as with any grand experiment, there were some challenges. The Googleplex, while groundbreaking, required vast land and resources, making it unscalable for many companies. It wasn't remote-friendly and often left employees feeling caged by the very innovations meant to liberate them. Not every company has Google's resources to provide such an elaborate workplace, and the extensive amenities, while impressive, blurred the boundaries between work and personal life.

While the Googleplex set new standards for office design and employee amenities, it also highlighted the limitations of location-bound physical office spaces. WeWork sought to change this.

Wave 3: WeWork and the Rise of Flexible Workspaces

Enter WeWork, the trailblazer of flexible office spaces. Founded in 2010, WeWork aimed to revolutionize the concept of office space by providing businesses with the flexibility they craved. No longer tied to long-term leases or fixed office spaces, companies could now opt for short-term, scalable solutions tailored to their needs.

The rise of enabling technologies like mobile devices, cloud computing, and contract employees fueled the demand for flexible workspaces. This synergy of technology and the gig economy created the perfect storm for flexible office spaces to thrive. Between 2015 and 2018, the supply and take-up of flexible spaces in the world's 20 major office markets quadrupled!

Pre-COVID projections even suggested that flexible spaces would account for 30% of all office space by 2030. These flexible workspaces removed the restriction of fixed office locations, allowing companies to scale up or down as needed, adapt to changing market conditions, and support a more dynamic workforce. In a study, Research Nester predicts an 18% CAGR growth of flexible spaces till 2035.

WeWork's model offered a variety of environments: open desks, private offices, and collaborative spaces, catering to the diverse needs of modern businesses. This flexibility not only attracted startups and freelancers but also appealed to larger enterprises looking to inject agility into their operations. WeWork's business model was based on aggregating short- and medium-term tenant-side demand while leasing long-term spaces from real estate suppliers.

However, WeWork's story didn't end on a high note. In a bold but ill-fated move, WeWork tried to transform into a traditional landlord by buying up real estate. This strategy, combined with mismanagement, led to its dramatic fall and eventual bankruptcy.

Despite the advancements in flexible workspaces, the quest for the perfect work environment continued. As these spaces grew in popularity, it became clear that even greater freedom and adaptability were needed. The limitations of on-site work, such as commutes and environmental impacts, remained problematic. This realization set the stage for the next evolution: remote and distributed workforces.

Wave 4: The Offices of 2024 and Beyond

As companies and employees increasingly seek flexibility and autonomy, the traditional office is becoming obsolete, giving rise to an era of remote and distributed work that fosters new levels of work-life balance and productivity.

As we look to the office of 2024 and beyond, the landscape of corporate real estate is undergoing a profound transformation. The traditional office is evolving, driven by the need for adaptability, creativity, flexibility, and specificity.

1. Adaptability: Demand for office is being reshaped because of distributed work. New-age startups are now opting not to have a physical office from the get-go, embracing remote and distributed workforces. Companies like Automattic, InVision, Buffer, and Zapier have never had a traditional office, proving that productivity and collaboration can thrive without a central location.

2. Creativity: As corporations become nimbler and less hierarchical, employees are taking on more creative and specialized tasks, especially in AI-assisted roles. This shift means that the average office worker no longer exists; instead, highly skilled individuals demand environments that cater to their creative needs and offer the best perks.

3. Flexibility: Asynchronous work is becoming more prevalent, enabling employees to work on their own schedules and collaborate across time zones. This is changing the very definition of an office with a fixed location and fixed working hours.

4. Specificity: The traditional “one size fits all” office product is losing relevance, making it essential to design office spaces that cater specifically to the diverse needs of modern tenants. New office buildings are increasingly tailored for specific uses, whether for a bank or a bakery, rather than being universally adaptable.

This evolution is leading commercial real estate investors into uncharted territory. The predictability and stability of operating rental income are diminishing, with returns from office spaces becoming increasingly volatile. As a result, investors may shift their focus towards residential, retail, and hotel properties. Renewal rates for office buildings are expected to decline further as leases come up for renewal, with nearly $1 trillion worth of office space set to be renewed in the US in 2024 alone.

In fact, cities around the world are trying to convert vacant office buildings into multi-family residential apartments, though it comes with its own structural challenges.

As Dror Poleg once wrote, the office of the future is not a single location. It is a network of spaces and services. Tenant companies don't want space, they want a productivity solution to help them attract and retain the best individuals - and empower them to product their best work. This shift is evident in innovative solutions that merge work with hotels, residential spaces, and retail environments:

• Hotel-Work Integration: At Moxy Hotels, common areas serve as workplaces during the day and transform into party lounges at night, blending work and leisure in a single space.

• Residential-Work Convergence: Designs like the Aula Modula apartment block, with its Tetris-like system of cube-shaped units and sliding wall panels, integrate collaborative office elements into residential settings, blurring the lines between home and office.

• Retail-Work hubs: Offices within retail spaces are increasing, turning traditional retail locations into multifunctional hubs for work and play. An example is Hej!Workshop in San Francisco, a coworking space furnished by IKEA, illustrating the trend of blending workspaces with retail environments.

As new innovations replace old paradigms, the economy benefits, despite short-term disruptions. The future of offices promises to be dynamic, adaptable, and tailored to the evolving needs of the workforce. Whether we shift towards a hotel-like model—where a single asset is owned, operated, branded, and marketed by separate entities—or embrace a future with no fixed offices, or a blend of both, one thing is certain: the landscape will not remain the same.

Exciting changes lie ahead!

The era of fixed, stable, and predictable returns in corporate real estate is ending. To thrive in a world of distributed work and borderless employees, investors, landlords, and tenants must embrace flexibility and innovation.

Thanks for reading this long-ish piece. Here’s a fun comic about a return-to-office mandate at a (fictional) company. Enjoy!

Engage with me! If you have any comments, feedback or want to get in touch, send me a message. Thank you for reading!

Best,
Kartik