Hybrid Work and the Future of Cities

Hybrid Work and the Future of Cities
August 10, 2023 17 mins

Hybrid Work and the Future of Cities

Hybrid Work and the Future of Cities

Work-from-home and hybrid-work models can significantly influence the commercial real estate market, which in turn has a major influence on the financial health of a city.

Key Takeaways
  1. Hybrid work has changed employee priorities for work and living spaces.
  2. Repurposing commercial real estate involves unique considerations and a combination of development strategies.
  3. A robust mass transit system can play a pivotal role in a city’s post-pandemic recovery.

Overview

In the wake of the COVID-19 pandemic, the way we work has been transformed. The adoption of remote- and hybrid-work models means that the commercial real estate industry and cities across the globe are finding ways to adapt.

Past business models thrived on people working in office buildings and city centers. But as fewer people are regularly returning to the office, real estate developers are grappling with the challenge of excess space and business leaders are examining ways to adjust to the new expectations of employees. Meanwhile, city planners, who once depended on workforces to keep their downtowns bustling, are keeping a pulse on shifts in people’s residential, office and recreational preferences. These complex factors have sparked a new conversation about the future of our cities.

In Depth

As cities change, stakeholders must contend with uncertainties and changing attitudes about business and residential real estate.

“For urban real estate, specifically office and retail, we’re starting to see some record vacancies,” says Kevin Madden, Aon Real Estate Practice leader. “But it’s a tale of two cities. Some cities are sending distress signals with the number of properties that ought to be reimagined, repositioned or just demolished. But others are flourishing, and the demand is outpacing the supply of new construction.”

Business and city leaders can stay ahead of the curve by understanding the risks and considerations associated with the current climate. The office of the future will look different and cities can begin to adapt now, knowing that changes in how we live and work will have significant influence on property design, urban planning and sustainability.

While it looks as though businesses and cities will need to make a substantial adjustment to respond to the way people want to live and work, with the right innovative approach, these changes can shape the future of cities — and the people who populate them — for the better.

New Priorities for Cities and Spaces

Hybrid work has changed not only how employees collaborate in professional settings but also how city residents live.

“Previously, people, especially millennials and Gen Z, were leaning toward smaller apartments,” says Madden. “The average one-bedroom unit was getting down to 700 to 800 square feet. We’re seeing that change now. Across the board, residents, even Gen Zs and millennials, want a bigger apartment. They want a work area or an office in their homes. And that’s changing how planners are designing the multi-family industry. It’s a direct result of the shift to working from home.”

City residents’ preferences are influencing not only the kind of homes they look for but also office real estate priorities. Corporate workspaces are changing as employees return to the office, and employees want to feel like going into the office is a worthwhile alternative to working from home.

“It’s about the smart building nowadays — the buildings need to be able to support the technology that tenants want to use,” Madden explains. “The office industry ought to go through what the retail industry has gone through, in that it’s more experiential. You’re going for the experience, not just the shop. Office buildings are becoming the same way. There are offices putting pickleball courts inside their buildings for the tenants, for example. They’re all focused on the amenities.”

Meanwhile, changing tastes and values have also made an impact on the way urban areas are managed. “People want to be in communities that are green and environmentally friendly,” says Peter Kennedy, national director in the Real Estate Practice of Aon Canada. Not only is this a relevant consideration for individuals, but it is also relevant for corporations as more are prioritizing sustainability.

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It’s about the smart building nowadays — the buildings need to be able to support the technology that tenants want to use.”

Kevin Madden
Real Estate Practice Leader, Aon
Reshaping Urban Centers

Repurposing existing real estate could help builders meet the needs of today’s workers and city dwellers. However, there is no easy solution for large-scale changes to certain kinds of construction.

“The obvious question is, why can’t we take that obsolete office and reposition it to residential space?” says Madden. “But the cost to redevelop or reposition a high-rise office building into an apartment building is almost as much as building a brand-new building.”

In addition to being costly, this kind of renovation can be time consuming and involve regulatory hurdles.

“All sorts of various code issues and engineering problems exist, so some forms of repositioning may not even be allowed by the city,” adds Tariq Taherbhai, chief commercial officer of global construction and infrastructure at Aon.

Because converting existing buildings may not yet be the immediate answer to the problem of too many offices and too little residential space, business and urban leaders will need to look at other solutions, including strengthening public transportation.

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The Mass Transit Lifeline

Some cities in the U.S. have struggled to adjust to the hybrid-work landscape. Many other countries, however, have found a way to keep people connected. Mass transit may be a large differentiator in determining how successfully a city recovers from the pandemic.

“Cities outside of North America have recovered stronger, particularly in the Asia-Pacific region and in Europe,” says Taherbhai. “It’s partly cultural. People have homes that are generally smaller than most American and Canadian single-family homes. Those regions also have much more established mass transit systems, which makes commuting easier.”

“If you have poor mass transit and people are just sitting in their cars for an hour and a half to get to the office, they’re going to be reluctant to go in,” adds Madden. “The winners will be the cities with the better mass transit.”

Such mass transit projects are a substantial undertaking, both in terms of capital and risk. In some cases, public and private partnerships may present a path forward.

“We may have to allow more private capital into our mass transit to see larger changes,” says Taherbhai.

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We may have to allow more private capital into our mass transit to see larger changes.”

Tariq Taherbhai
CCO, Construction and Infrastructure, Global Industry Specialties
Adapting and Reimagining the City

While they seem daunting, current building, real estate and infrastructure challenges are not unprecedented. From the post-war rise of the suburbs to cities becoming more residential again, large shifts in how people live and work have always created opportunity. Today, hybrid work is that catalyst.

“Real estate has always been a very dynamic and ever-changing industry, and hybrid work is just another step in that road,” says Kennedy, “It’s just another way that the real estate industry is going to have to adapt and change, like it always has.”

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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