The game has changed for ever. New products are coming to replace Zoom, and the real office

There were two clear takeaways for us from the most recent REFIRE/Targa Communications Roundtable Discussion broadcast live last week. Firstly, investors should be very wary about yield assumptions on office properties made in the pre-COVID era, although it’s by no means bad news for holders of good quality core assets. Secondly, few things are obvious about which way the market is headed, and taking a differentiated view on asset classes and individual properties is the only proper way to face this very uncertain future.

Timo Tschammler, ex-JLL boss in Germany and now an independent consultant and adviser, stated emphatically that COVID should be seen as an accelerator rather than a cause of the forces now exerting themselves on the market. He’s quite correct. Torsten Hollstein, another veteran of several real estate cycles, knows that the current phase will create more diversity and certainly some arbitrage opportunities. There will certainly be losers, apart from the obvious victims of the retail and hotel and hospitality trades. As price visibility becomes clearer, new strategies will emerge, and the next phase of creative destruction will arise to sweep the vulnerable and obsolete from its path.

Between now and then, there’s likely to be quite a lot of pain. Germany acted swiftly and brutally to cancel Christmas as the pandemic threatens to spiral out of control. As we lock ourselves down, 440 vaccine stations are being hastily erected nationwide to start dispensing the first of the five million vaccines the Government has ordered to kick-start the protection process. Germany, with the second-oldest population in the world after Japan, will be jabbing away for months before any of the younger and most productive members of society will be lining up to get their shot – assuming they’ll take it. The best estimates suggest it’ll be December next year at the earliest by the time the 45 million under 60-year-old inhabitants belonging to the lesser-risk categories will be lining up to receive the vaccine. Herd immunity is at least a year away.

That’s quite a long time in the world of work. One year ago we were immersed in Dror Poleg’s gripping book Rethinking Real Estate – written well before COVID – and remember being both fascinated and a little horrified in equal measure. Surely this stuff, while imaginable, was still far in the future, we thought. A bit like watching Star Trek, and then traipsing into the kitchen to chow down on a hearty down-to-earth meal of Kohlrouladen, dumplings and red cabbage. A glimpse of the future, nourishment perhaps consumed in the form of vitamin pills… only to succumb to the comforts of the tried and trusted.  Just one year ago.

It’s understandable that the real estate brokers in their end of year reports are at pain to point out how solidly prices are performing. Exaggeratedly so, we can’t help feeling. Maybe they really are holding up strongly, in the absence of much price visibility. Time will tell.

We doubt it, frankly. Poleg, who has long grappled with the future of cities and buildings, also has sharp insights into the world of work, and how – and where - ideas will be transformed into productive output. And these are at odds with a lot of what we’re seeing. There is still the assumption among many in the real estate industry that, once the initial thrill of working from home has worn off, we’ll all secretly be glad to get back to the office. A hybrid model, of course, with perhaps a couple of days of WFH to boost productivity. And yes, we do need to see our colleagues frequently enough to foster non-Zoom relationships.

We’re convinced though, that people are overestimating the probability of companies successfully imposing a back-to-the-office regime, and seriously underestimating the real impact of remote working or being able to show up just occasionally.

That’s because we tend to assume that companies decide things. And companies who continue to believe that may find that the best talent is drifting away just as they’re committing to another 5-year lease agreement on space now unsuitable to their needs. The fact is, it’s the best people who are now choosing to decide things, rather than their employers.

And this doesn’t just mean more Zoom, or Teams or even Slack. Even as we tire of another day full of robotic Zoom meetings, the technology is evolving at a breathtaking pace to innovate ever-more lifelike Virtual HQ space, which helps us feel and act like being in a virtual office. Germany is a little behind the curve, but from across the pond software tools like Huddle, With, Gather and Here are in the starting blocks waiting to transform our office experience. Virtual events companies such as Hopin and Loom, with eye-watering valuations for little more than start-ups, will be eyeing the European markets with relish.

COVID has opened our eyes to ways of working that were, for anybody other than early adopters, pretty unthinkable a year ago. Now they’re routine. A flood of products is waiting in the wings to enhance the collaborative work experience beyond our wildest imaginations. And, Zoom-hardened as we now all are, we’ll embrace these technologies far faster than we would ever have done before. The challenges facing the owners of anything but the very best offices, and who can attract the very best staff, are far more acute than are priced in to a great many urban office investments.