Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.

Can better offices close the UK productivity gap?

Are the conditions in your office helping you to work more effectively? Improving workplaces in Britain could lead to major gains in productivity, benefiting both the economy and real asset investors alike.

In broad terms, the productivity of the UK economy is way behind where it should be, relative to both its own history and the rest of the G7. The UK is also more dependent on the output that comes from people who work in offices than ever before.

In absolute terms, the number of office workers has grown by more than 80% over the last 30 years

We are not saying that better offices will close this productivity gap entirely but there is an increasing body of evidence that shows it can make a meaningful difference. Even a 3% nudge would equate to about £50 billion a year in extra output for UK plc.

Around 140 million working days are lost each year in the UK due to illness.[1] Many of these are avoidable and can be traced back to working environments which do little to protect users from musculoskeletal complaints or contagion from cold and flu, for instance. If you add in 'presenteeism' – the practice of coming to work when you feel distinctly below par – this is a near £100 billion a year problem,[2] not to mention the societal cost to the NHS of treating avoidable illness.

To be productive, you need to be well – both physically and mentally

There has been an increasing focus on wellness in recent years led by new standards such as the Well Building Standard and Fitwel. Recent studies have also measured the productivity advantage that can be gained from better real estate. For instance the Stoddart review of 2016 found that real estate can drive a 3.5% improvement in productivity and the British Council for Offices (BCO) summarised an average of 2.7%. Most recently, a combined project called Whole Life Performance Plus reported that controlled test scores were 6% higher when conducted at room CO2 levels below 1,400 parts per million and proof reading tests specifically showed a 12% change.

The implications for real estate owners

 

  1. Savvy occupiers will choose between buildings based on the productivity benefits offered. After all, if 15% of a company’s operational cost base is its real estate, with 55% on staff salaries[3], then getting extra output from this 55% would more than offset the cost of providing better offices. Higher rents can be justified by thinking about real estate as a performance lever not a cost.

 

  1. If it doesn’t get reflected in rents, better buildings are more likely to retain occupiers and depreciate less. This means potentially stronger investment returns.

 

  1. There is also litigation risk to be considered. If an employee sitting next to window with daylight and fresh air performs better, and is therefore better rewarded as a result, can another who does not sit near the window sue their employer as a result? And could the employer counter-sue their landlord?

 

  1. The monitoring of indoor environments through personal technology is improving. At some stage smartphones will have CO2 monitoring devices which will warn when particulates rise above a threshold known to be detrimental to cognitive function; 1,400 parts per million.

 

  1. A likely implication of the greater use of Artificial Intelligence is to increase the importance of cognition. “Knowledge” businesses will need to differentiate themselves. It is not outlandish to foresee maximum CO2 concentrations being demanded, monitored and used to demonstrate competitive advantage.

 

  1. Currently, Building Management Systems are not set up to monitor indoor environmental quality to today’s exacting standards. We will need more sensors connected by the internet of things. But who pays and manages the hardware - the occupier or the owner? How will the data be managed and utilised - and how will sensors be protected from hackers?

 

It will increasingly be in an owner’s best interests to curate a productive, healthy environment for their occupiers over the length of a lease, with potential financial benefits to both sides. A new set of skills will be required, elevating real estate professionals into science-based enablers of effective space. Skills in biology, physiology and psychology will be needed alongside engineering, surveying and financial appraisal.

In our capacity as owners of a significant amount of UK office property, we will need to mitigate the risks caused by this rising tide of evidence. But a better approach would be to promote the productive benefits of well-functioning office real estate.

If you’d like to hear more about this topic, Bill was recently interviewed on the wellbeing investment opportunity on our weekly podcast, LGIM Talks.

 

 

 

[1] ONS

[2] Vitality Health, Cambridge University and Mercer

[3] BCO, The Proportion of underlying business costs accounted for by real estate, 2016. The other 30% is general business costs such as IT and procurement

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