The end of shops and offices; and the birth of something new?

In the previous edition of this blog, I talked to how the ‘virtualisation’ that materialised some time ago in retail, has now arrived for offices. Whereas there are several contextual differences, there is a similarity to the solution, which starts to raise more fundamental questions. What is an office? What is a shop? In the future, how different might these two concepts actually be, and what does this mean for investors?

At its most fundamental, real estate comprises a physical environment that protects users from the elements whilst carrying out activities. It is also a bundle of legal rights that keeps a location private from the wider world and allows the owner to charge a rent for its use. Within this broader definition, a shop is somewhere to carry out retail activity, an office is somewhere to carry out clerical work, and so on.

This begs the question, what is retail? At its simplest, it is the act of selling products. I’ve heard it described as the change of ownership of an asset from a commercial enterprise to a consumer; the shop being a place for that transfer to take place. And what is clerical work? It could be described as the execution of knowledge-based tasks; the office being where you sit to do this. The challenge is that these definitions are oversimplifications and the emphasis has already changed away from transactions and tasks towards a much broader spectrum of activity.

Firstly, the combination of automation and artificial intelligence is changing the nature of work. Basic tasks are being stripped, and work is skewing towards the things that tech can’t do as well: creativity, persuasion, empathy, and complex problem solving. Thinking, often in combination with others, rather just executing processes is now the essence of work. If you think back to the percentage of administration that has already been removed from our jobs over the past 20 years the shift in focus is clear. Various studies on the future of work all point to the acceleration of this trend in the decade to come. A refrain of the past 6 months has been that the future of office work will focus on these narrower criteria, whilst the execution of tasks will remove to the home office.

Secondly, the nature of retail has changed. Perhaps the key competitive factor in retail historically was the footprint of your distribution network. 50 years ago, most people would buy a product by taking a walk down their local high street, browsing the stock and comparing it with the stock in other shops, then paying at the till. If you weren’t on the high street, you weren’t in business. But it was never just about the transaction; it was a complex series of interactions mainly aimed at persuading you to buy the product. All of these interactions were bundled in one venue; the shop. Now, even if you buy online, chances are that elements of the retail process (creating a customer, product awareness, intention to purchase) may have been completed before you open your browser. This may still include a trip to the high street – many people prefer the focus that the high street places on choice, compared with the vast expanses of the internet. They also may just go for enjoyment. Equally, younger buyers in particular will have been bombarded by tailored brand and product messages on social media months before they actually buy a product. The point is that decisions on brand, product, fit, customisation etc no longer necessarily coincide with the transaction – retail has become unbundled.

And so, as the internet strips the more functional elements of work and retail away from the office and the shop, and typically towards the home, the nature of what is left to execute in these environments changes. The less exciting, functional and transactional elements of work and retail are being relocated away from their traditional homes of offices and shops, and conversely, the exciting, interactive, experiential bits are becoming the focus of the shop and now the office.

The future of office-based work, we are told, is about persuading (leadership, sales), empathy (customer relationships, management), creativity (innovation and new value) and experiences designed to stimulate staff. The future of shop-based retail, we are told, is about persuading (marketing, sales), empathy (customer loyalty, repeat sales), creativity (enhancing the brand), and experiences designed to stimulate the customer. Not so different?

The synthesis of this is that soon there will be more in common between the retail, leisure and work activities that take place in our city centres, than there will be for instance between work carried out at home and work carried out in city centre offices.

Coming into the city centre is no longer about executing sales or carrying out tasks. It is about interaction with others, sharing information, persuading others, and engaging the senses. The same is true regardless of whether you are in a shop, office or restaurant. The nature of these activities is blurring. The persuasion process underpinning sales is a core activity in any business. Are sales better executed in offices, or in more experiential environments like shops or restaurants? When businesses want to drive innovation and creativity they often decide to take their teams on an offsite. Why? Because people are thought to be more creative outside of stale and distracting office environments. If this is central to the concept of work going forward, then why not make offices more like hotels?

This also drives a need to re-categorise what we mean by shops, offices and leisure. If the home is now the place that you do some of your work, is that really the office? If you go to a shop to browse, but with no intention of buying anything, is it no longer a shop? If you order something on Amazon whilst in the office chatting to your colleagues, is your office a shop?

We need to stop categorising our real estate assets based on activities which no longer exist in the form that they were conceived. I propose a new simpler classification: Interactive Zones and Focus Zones.

Focus Zones are housing led areas. They are places where you rest, spend time with your family, shop online, work on tasks from home, and enjoy nature. The emphasis is on go slow, focus, privacy, and wellbeing. You go there to recharge. Meanwhile, Interactive Zones are a reincarnation of the CBD as a forum for interchange of ideas and experiences. The emphasis is on interaction, a fast pace, excitement, experience and stimulus.

Doesn’t this just describe the current state of our CBDs and suburbs?

No; it really doesn’t. Most of the activities carried out in our central zones are still passive ones, which you don’t need to waste finite central space to achieve. Most offices for instance are still organised as rows of desks, or cellular layouts, designed to achieve privacy. And as I mentioned in the last blog; most shopping trips are still carried out alone. Meanwhile most of our suburbs promote neither wellness nor focus.

What are the implications of this change washing through?

Firstly, the recent change to the Uses Classes legislation in effect envisages this change, through combination of the former A (retail focussed) and B (work focussed) elements. Use-regulation is designed to promote a cohesive mix of compatible activities, and as these activities blur, it is right that the planning regime adapts around them.

The distinction between active ground floor uses is already changing, as some offices start to include interactive reception areas, as shops incorporate cafes, and as new product types emerges that mix of all these activities under a single roof.

From a product perspective, we need to get much more used to flexibility. Not just from the perspective of lease commitment, but also from the perspective of use. The best spaces need to be adaptable to change uses quickly. This might be a greater focus on pop-up operations, but where pop-up includes not just retail, but also work-related elements, including conferencing. It might also include recycling uses within the same building within a single day – work in the morning, shop in the early evening, leisure by night. The practicality of this comes down to the physical adaptability of the space, including the M&E. Generally, I’d envisage a convergence of the physical nature of an office and a shop, both in terms of the base build, but also the furniture. Imagine that desks are a thing of the past, and people are happy to sit on a sofa to shop. If you’re looking for inspiration on this, check on Sidewalk Labs ‘Stoa space’ proposals, or look back to the Roman Forum.

This also raises questions of privacy. Generally, it should be assumed that the future ground floor space will be open to the public, and not privately demised. The ground floor becomes the ‘shop front of the office’. The bigger challenges lie on the upper floors. In the West we have been reluctant to adopt vertical public zones or vertical retail; however, these concepts are much more readily accepted in Asia.

From an investment perspective, we need to think through how this change might affect value drivers. For investors seeking sector diversification or looking to correlate future performance with historic demand drivers, a new approach will be needed. Demand for and performance of any type of space in the Interactive Zone for instance is likely to move in step, rather than align to historic retail and office sector drivers. To provide an example, the elements of work that have been relocated to the home office tend to be the linear and focussed private tasks at which modern technology takes aim. I therefore suggest that automation will disproportionately impact commercial activities (and space needs) in the Focus Zone, than commercial activities in the Interactive Zone. This may cause a rethink of portfolio weightings and measurement.

Finally, let’s not forget the Focus Zones. The quality of public realm, amenity and vehicles to help us regain focus need to be significantly improved over the status quo of our suburbs. ‘Focus’ should be differentiated from ’Interactive’, but that does not mean bland, nor is it any less important to get right. Greening must be a key ambition, as should the provision of quiet space to congregate as families and in small groups.

At the end of the day, real estate is defined most, not by its form, but by the activities that it houses. The office and shop are more recent constructs than most presume, and maybe now is that time for them to be replaced by something new.