COVID gave us telework and now demand for office space has tanked

Services and gaming companies adopting hybrid work models allowing work from home two days a week to cut costs, decreasing the need for expansive office spaces

By: maltatoday.com

Aug 19 2024
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COVID gave us telework and no

Real estate agents are struggling with a market where demand for office space has tanked while supply has increased.

The Central Bank of Malta has called this a “misalignment between pre-pandemic investment strategies and current market demands”.

A report by the CBM exploring the impact of teleworking arrangements on the demand for office space, shows that while various business sectors have gone back to operating from their offices, hybrid work models have also led to an oversupply of office space.

The supply of offices surged before the pandemic as a record number of large-scale developments which included an office component were approved by planning regulators, on the premise that Malta needed more offices to satisfy a growing demand.

But these expectations were dampened by the COVID-19 pandemic, with the data showing that teleworking has outlived the two-year austere period. The share of employees working from home reached an unprecedented peak of 14.8% in 2020 and 2021. Though this figure dipped to 11.5% in 2023 as restrictions were eased, the percentage of teleworkers remained notably higher than the 6.1% recorded in 2019.

Gaming sector needs less offices

But the impact of teleworking on office space demand differs across different sectors of the economy.

The services sector, particularly those in audit, consultancy, and gaming, experienced a tangible shift. Several companies in these industries successfully reduced their office space requirements by adopting hybrid work models. For example, some firms now allow employees to work from home two days a week as a cost-cutting measure, thereby decreasing the need for expansive office spaces.

However, this trend is not uniform across all sectors. In contact-intensive industries, where physical presence is essential, the impact of teleworking has been minimal. Many employees prefer or are required to work on-site due to the nature of their roles, resulting in little to no change in office space needs.

The manufacturing sector also shows limited uptake of teleworking, with its impact on office space demand remaining negligible. This is largely because teleworking is generally confined to administrative roles, and the physical presence of workers is still crucial for manufacturing processes. Even as automation slowly gains ground, Maltese manufacturing firms remain reliant on traditional production methods, further diminishing the potential for teleworking to reduce office space requirements.

Similarly, in the wholesale and retail sectors, the feasibility of teleworking is low. The nature of these businesses necessitates on-site work, whether it is managing stock, handling customer interactions, or overseeing day-to-day operations. As a result, teleworking has had little to no effect on these companies’ office space needs.

Real estate sector feels the strain

The real estate sector, however, tells a different story. The Central Bank report highlights a significant oversupply of commercial office space, a direct consequence of changing work habits post-pandemic. Real estate agents and developers are grappling with a market where demand for office space has not kept pace with supply. This oversupply put downward pressure on rent prices, forcing landlords to adjust their expectations and insert annual price increase clauses in commercial leases to mitigate losses.

Moreover, some agents highlighted that new commercial office spaces will soon enter the already struggling market and this could have more severe repercussions on commercial rent prices.

This suggests a misalignment between pre-pandemic investment strategies which anticipated steady demand for office space, and the current market reality shaped by the shift towards teleworking. Some realtors also referred to a decline in foreign direct investment after the pandemic which is further crippling the demand for office space.

Teleworking from abroad

The report also refers to a growing trend among some companies to leverage teleworking as a means to access a broader labour pool, including workers that offer services from their homes overseas warning that should this practice become more widespread, it could have significant consequences for the demand for local office space, further exacerbating the challenges faced by the real estate market.

The report was published in the Central Bank of Malta’s Business Dialogue series which is based on feedback by different stakeholders in the Maltese economy.