From factory to free-range offices. At a price.

Last week, leading Australia developer Mirvac called for an overhaul of what it called "outdated metrics defining office spaces." The call was in response to new, hybrid modes of work and new workplace design in the wake of the Covid pandemic.

Mirvac is right to explore new office metrics. The current building grades categories, methods of measurement and methods of calculating vacancies and occupancies are little changed in decades. They have served the industry well enough but come from an era of factory mode office work, with workers dutifully lined up at their cubicles, all arriving at the same times and mostly leaving at the same times. Those days are gone.

To quote from the story in The Australian:

(Mirvac head of integrated investment) Campbell Hanan argues for the need for a different system of measurement of office values as both the nature of work and what draws tenants to buildings has changed.

"There's a new paradigm coming now, which is all around experience, because there is a whole new adaptive way of work that's happening," he says.

He cites British developer Sir Stuart Lipton's remark that offices will go "from factory farming to free range". This will prompt a change from a sea of workstations to more open, collaborative spaces, which should be recognised in building values.

He says tenants going into next generation buildings are focused on issues ranging from ESG concerns, employee experience, and post-pandemic concerns about air circulation and managing spare desks.

No doubt he's right. To attract key workers back, the new workplaces will feature building service upgrades embracing an array of embedded technology, HVAC and environmental features not seen in typical worker drone office buildings. There will be more outdoor spaces, garden terraces, lounges, recreation and exercise areas. The notion of offices with an average of 8m2 or 10m2 per person is gone from this new office nirvana. You are looking at more like 20m2 per person (a historic average by the way, before we let accountants define our workspace needs).

That space is also going to be costlier to build. Added to the recent general escalation in building costs, and developers of this new breed of office are going to need to do their sums even more carefully.

But it's potentially worse for the occupier. A simple back of envelope comparison suggests the two big variables will be the fit out cost, and the number of people per square metre. If an occupier moves from a typical 'A' grade building with basic fit out and 10m2 per person, to a premium "new" design for the post covid world with much higher fit out costs and fewer people to the square metre, it is conceivable that real estate costs per person could nearly triple.

(No, in this example no allowance is made for post-tax fit out depreciation or rental incentives or other deductions. Fit out is simply divided by 6 on a six-year lease basis, as many tenants are reportedly looking for shorter, more flexible terms. Very basic and hypothetical numbers for illustrative purposes only).

How will the market respond to this? Would traditional "paper factory" tenants with legions of administrative and support staff be comfortable with a real estate cost per person that is close to half the salary of many of its workers? Or would they elect to split their workforce into the "worthy" higher value employees for the new CBD premises, while admin and support staff are encouraged to continue working from home, or from a distributed low cost hub?

Does it mean a likely bifurcation of the market, as predicted by Mirvac's Haan who said "We're going to need to value it because there will come a time when some buildings which offer unique experiences compared to others, are going to attract valuation premiums." Which also means lesser buildings will be discounted.