10 TRENDS FOR 2023
Cities are back. Almost three years after the onset of the Covid-19 pandemic, streets are bustling with shoppers, bars and restaurants are packed, sporting events are sold out and peak time commuter trains are jammed. But as our Vitality Index reveals, the recovery is nuanced and some city centres continue to struggle. In particular, office occupation is still down on historic levels – with significant implications for occupiers and investors.
Avison Young’s Vitality Index uses anonymized cell phone location data from Orbital Insight to estimate total foot traffic in strategic locations across cities in Canada and the United States. Our Cities Recovery Index uses similar high frequency data from a variety of sources to do the same in the U.K. Overall, the analysis shows that city activity has largely recovered towards pre-pandemic levels. Weekly visitor volumes in North America are back to 80-90% of those seen in early 2020 and continue to show an upward trend.
Visits to Big Box retail may still be down in North America, but overall retail traffic is 15% up on pre-pandemic levels. The Vitality Index shows visitor levels in downtown areas on weekends is now well above pre-Covid-19 levels.
City activity has largely recovered towards pre-pandemic levels.
That also means traffic on recreational public transportation has increased. After dropping nearly 90% in the first month of the pandemic, average traffic across North American transit has rebounded to 87% of where it was before lockdown. Airports have become especially busy, with visitation down just 8% versus early March 2020. There are variations between cities and districts, but the common thread relates to experience: when people are looking for enjoyment and entertainment, they are heading back to the places they can find it – which often means the heart of the city.
TOTAL VISITOR VOLUMES WEEK OF NOVEMBER 14, 2022 ARE 82.5% RELATIVE TO THE WEEK OF MARCH 2, 2020
Source: AVANT by Avison Young
Faced with the challenge of online shopping, retailers have long been focussed on developing their in-store experience to lure customers back into their buildings. Attractive interactive fixtures, often integrating technology, are developing their omnichannel offer to ensure that “going shopping” – as opposed to just buying things – is as much a leisure activity as it is a purchasing process. Whilst not all central cities are currently attractive places to shop, many are. Urban retail visits increased by almost 20% during 2022 while those to suburban and rural locations fell by over 10%.
When and where we choose
to work has changed.
A similar set of challenges is now facing office owners and employers. The Vitality Index also clearly shows what we all anecdotally know: office attendance is still well below what we used to think of as normal, with visitor volumes only back to around half their previous levels. The trend remains upwards, with office footfall up 40% up in the traditional return-to-work week following Labor Day in 2022 compared to the equivalent week the previous year. In the U.K., transport data shows passenger numbers back to 70% of pre-pandemic levels during the week, with WeWork reporting that workers were shifting their preference away from locations closest to homes in favour of those nearest to major urban transit hubs as being in a city centre become increasingly critical.
But the overall recovery is slow; when and where we choose to work has changed such that the office sector is confronting its own version of online shopping.
The working week
Foot traffic is back to 44% of
Foot traffic is back to 57% of
Foot traffic is back to 41% of
Not surprisingly, there are clear patterns within the working week. The Vitality Index shows that footfall is back to 57% of pre-pandemic levels on a Thursday, compared to 44% on Mondays and just 41% on Fridays. However, even here the pattern is changing. Data on underground exits in the heart of the City of London show passenger numbers rose by around 42% during the working week over the course of 2022 – but were up by 56% on Mondays. Is Monday being pulled back into the office week?
We believe it is, for various reasons that we anticipate will drive a long-term trend of increased presence in the office. Working from home has clearly been shown to boost productivity for certain types of activity, but collaboration and innovation still works best in person for most businesses.
As office attendance continues to edge up, it also makes being in the office – which is often largely about personal interaction- more worthwhile. As more people return, the FOMO effect of being at home when others are in the office will gradually reassert itself, encouraging people back into the habit of being mainly in the workplace unless they have a specific reason not to be.
That will be accentuated as we move into a new phase of the economic cycle. Labour markets are still tight, but rising unemployment and a weaker economy will make many people want to ensure that they aren’t just working, they are seen to be working.
That doesn’t mean that hybrid working will disappear, or that we will all be back in the office full time. When we need to be at home because a new dishwasher is being delivered or a child is off school, we will work from home rather than dashing “back to work” partway through the day. We will also schedule focussed tasks for those times that we’d prefer not to be in the office – which may well continue to be at either end of the week. Fridays have always been quieter in the office, we’re just more aware of it now because we’re poring over the data. But that’s not true of Monday mornings. Few of us relish the end of the weekend so we can get back to the office at the start of the week but easing ourselves into Monday by avoiding the commute could well come to be viewed as a distinctly pandemic-era approach.
What about properties?
For the property sector, there are also some strong signals about what employees – and thus occupier decision-makers - are now looking for. For those used to working from home, the biggest challenge in getting them back to work is the commute. According to a recent survey of nearly 3,000 knowledge workers, over 60% say that “no commute” is one of the top three benefits of working remotely. By comparison, less than 40% cite “more time with friends/family”.1 Other studies report similar results, with the time and cost savings, as well as lower stress, most often cited as the benefits.2, 3
In the past this has led to much discussion of “hub and spoke” models or suburbanisation of the office portfolio, to bring work closer to the employees. This may work for some but finding one location that reduces everyone’s commute compared to a location in the middle of the city is… tough: it’s called the Central Business District for a reason! On the other hand, taking multiple locations around a city simply fragments the workforce, which misses the whole point of wanting to get everyone back together and invariably adds to the cost – the exact opposite of what CFOs are looking to do to their property expenses.
In 2022, KPMG reported that 65% of CEOs see a return to the office as the ideal working environment over the next three years.4 For business leaders looking to encourage employees back to their desk– there are some signals from the data. There are clear variations in return to office rates between cities, with those that offer especially vibrant workplace experiences, such as Charleston, Miami and Nashville, seeing attendance of 60-70% compared to a U.S. average of around 45%. There are almost certainly other factors involved – including ease of commute – but we believe the quality of the overall environment in these cities plays a significant part. Interestingly, these cities also have comparatively strong office visitation on Mondays, typically around 60% compared to the low 40%-range that is the national average.
Quality does matter
The quality of the building also makes a difference. The Vitality Index reveals that office footfall in the very best ”trophy” buildings is almost 10 percentage points higher, at over 50%, than in poorer quality buildings. This is starkly confirmed by data from office survey specialists Leesman5, showing (perhaps unsurprisingly) that employees want to come back to the office more often when they think it provides a better working environment. They cite the example of one company with three offices in the same country, with consistent management and workplace policies. The three buildings were rated differently according the employees that worked in them – one being exceptionally good, the second still well above average but the third quite poorly.
Leesman's Lmi is a functionality and effectiveness score calculated for every workplace measured, and provides substantive insights into the value of workplace quality.
When questioned about how often those employees wanted to be in the office, over 90% of employees in the best building wanted to be back in their workplace four days a week or more. That fell to around half of employees in the second, still above average, building – and to well less than a third in the worst building of the three. It’s not the only factor, but if you want people back in the office, you have to provide an exceptional working environment; and what was good enough is no longer good enough.
What was good enough
is no longer good enough.
Employers are getting the message, and it’s starting to show in the market. In Manhattan the net effective rent (NER) for trophy buildings has increased by 13% since 2018, while the NER for Class A buildings – which are still good quality - has fallen by 3%, with large-scale tenants in particular focused on trading up to higher quality offerings.
MANHATTAN OFFICE RENTS: BASE VERSUS NET EFFECTIVE
Source: AVANT by Avison Young
The volume of demand focusing on quality has increased accordingly. In Manhattan, trophy properties comprise the top 10% of the market, yet have attracted more than 30% of leases in the first half of 2022. This pattern can also be seen in the U.K., where there is growing evidence of trophy assets consistently outperforming the market in terms of leasing velocity while setting new record headline rents. The rents achieved on the upper tier of better quality buildings in London has outperformed the rest of the market.
LONDON TOP TIER VS LOWER TIER RENTAL GROWTH
Source: MSCI, CoStar
This emerging bifurcation of the office market is also being heavily influenced by the climate crisis, which is placing sustainability firmly towards the top of the corporate agenda. A 2022 survey of 3,000 global CEOs revealed that over 80% believe that sustainability investments will drive improved business results in the next five years.6 This is particularly true in the real estate sector, where demand from major occupiers making high profile statements through their choice of building are overwhelmingly focussed on the most environmentally friendly properties.
This in turn is feeding through into the investment market, where buyers are prepared to pay a premium for the best buildings that occupiers are demanding – rather than secondary properties which in most cases will require upgrading to meet increasingly rigorous government energy efficiency requirements. In London, modelling by Real Capital Analytics7 suggests that the capital value premium for green buildings now exceeds 20%… and is still rising.
LONDON OFFICE GREEN BUILDING PRICE DIFFERENTIAL
RCA Hedonic Series pricing; difference between buildings with and without environmental ratings from BREEAM or LEED.
Opinions on the fortunes of the office sector are sharply divided. For those that believe that we will see a long-term return to the workplace, the value-add opportunity is to reposition those secondary assets to take advantage of strong occupier – and employee - demand for the best, most sustainable buildings. This is not without risk, but with the repricing that we expect to see coming through ever more clearly in the data it could well be justified by the return.
1 https://www.dropbox.com/s/5nwhtybmcq42qid/Rock.pptx?dl=0 (See slide 9)
7 MSCI Capital Trends Europe, Q3 2022