Summer is over, and with that —you guessed it— the rentrée and the great migration back to work. But after over two years of COVID-19 and the reimplementation of tighter remote working rules for non-residents, what can we expect from the way we work, and more precisely, the office?
Given how much more frustrating the morning traffic is today compared to ten years ago, it might not be hard to believe that the number of workers in Luxembourg has skyrocketed 84% over the last two decades —from 264,000 in 2000 to 486,000 as of end-2021, according to STATEC.
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While we aren’t writing this blog to delve into Luxembourg’s job market history —we’ll leave that to the National Museum— it’s important to get a grasp of its trajectory to gain a foundation for this entry’s subject: a look back and a look forward at the country’s vast office sector real estate (RE) industry.
The role of the office in Luxembourg in the past
It takes no stretch of the imagination to see that the Grand Duchy’s built environment has had to undergo a dramatic shift to accommodate this fast-expanding work pool. After all, office workers need an office! And this is even more true as the country has solidified its role as a global hub for the wholesale, administrative and financial/insurance sectors.
In accordance with the growth in the numbers of workers, the country’s total office space more than doubled over the past 20 years —surging from 2.2mn m² in 2001 to 4.5mn m² as of end-2021.
Given this, it perhaps comes as even less of a surprise that the office sector has long represented the backbone and engine of growth for the Grand Duchy’s real estate sector —alone accounting for approximately 70% of total Corporate Real Estate investment in Luxembourg in 2021 and as much as 78.4% as of Q2 2022 according to CBRE.
Overall Office Stock Evolution (in million m²)
Source: PwC Market Research Centre, JLL
And then came COVID-19
After decades of smooth waters and unabated growth on the back of a fast-increasing working population and an abundance of empty land, the sudden outbreak of COVID-19 in March 2020 has challenged the status quo like never before.
Much like the rest of the world, the emergence of the pandemic and the subsequent implementation of sanitary measures saw Luxembourg’s office workers moving their work laptops from their desks to their living room couches, and working and socialising over a plethora of different video conferencing softwares.
Though this shift arose out of immediate necessity, this new way of working presented many upsides, with many enjoying the time saved from their morning commute, or the ability to spend more time with their loved ones.
In other words, while the Luxembourgish government’s work from home (WFH) order represented an unprecedented and unexpected shift, it has led to a paradigm evolution in employees’ expectations, with 66% of the Luxembourgish workers surveyed by Inowai in April 2022 stating that they wish to continue splitting their workdays between home and the office.
Subsequently, employers across the Grand Duchy have adapted to this preference shift, providing their employees with the flexibility they require —with numerous companies allowing their employees to work from home at least some days a week.
This has raised questions on the future of the physical office, with many wondering what role it will play in a world where many office workers are able to choose between a suit and tie and a dressing gown. Although the premature “end of the office” discourse has ended, the question remains: how will this shift towards flexibility affect Luxembourg’s retail RE market?
In this new backdrop, the future of work —and its impact on the office sector— stands as a fascinating question mark.
The rebirth of the office in a post-COVID world
It turns out that the situation didn’t materialise in quite the dramatic fashion that was initially anticipated. Our analysis suggests that the Grand Duchy’s office sector in fact weathered the COVID-19 storm, remaining largely resilient to the expected market shocks.
Indeed, despite a decrease in the number of deals and the unfavourable conditions, both 2020 and 2021 saw record take-up figures —with a respective 348,500m2 and 369,300m2 being let out in each year respectively. While these record figures could be attributable to contractual obligations made prior to the pandemic, the rate and scale of this increase in take-up nevertheless attests the office market’s strength and resilience during periods of economic uncertainty.
While the above largely serves to disparage the premature cries of the “death of the office”, this doesn’t mean the return to the office equals a return to the pre-COVID status quo.
In fact, this above-mentioned shift in employee preference towards working from home has left the ball in the occupiers’ courts —so to speak— to attract their employees back to the office.
That’s why, with most workers now splitting their workweek between the home office and the actual office, employers (and subsequently, developers) are now under pressure to re-energise and revamp their office spaces to render the latter a more attractive option than the former. This has led to an industry- and world-wide ‘flight to quality’ —with occupiers seeking out the highest quality workspaces to attract their employees back to the office.
Many are flocking to high-tech office spaces boasting amenities that exceed home conveniences, while also boasting the amenities necessary to provide their workers with health and wellbeing services that would have seemed a distant reality only a few years ago.
Return to the office: A call to action
To sum up, it seems the rise of remote working may not quite impact Luxembourg’s office real estate landscape in the way it was first anticipated.
While the WFH phenomenon and shift towards a flexible model of working hasn’t spelt the end of the office as initially foretold, it has in a way led to the rebirth of the office. In this new backdrop, property developers will have to deeply rethink the workspaces they develop, while employers will have to rethink the workspaces they provide to their employees.
Now that many office workers have the choice to work from home, offices must be rethought and repurposed to provide workers with facilities and services superior to those they have at home. However, this is perhaps less of a pressing issue in Luxembourg than is the case in other countries, with the country’s approximately 200,000 cross-border workers being required to come back to the office for tax and social security purposes.
That being said, the fact remains that the old desk-screen-and-chair model isn’t enough anymore; the offices that will be able to maintain a ‘full house’ will be those that provide their employees with some kind of experience rather than simply a place to work.
This can be done through the refurbishment of common areas into leisure spaces, the development of green areas, the organisation of frequent office-wide events (for instance, happy hours, bazaars and fairs), among others. In other words, employers and property developers should ensure that the office space is worth the employees’ commuting time —and early alarms.
Considering the extent to which the Grand Duchy’s RE market relies on its office sector, it’s fundamental that offices shift in line with shifting tenant preferences. The power is clearly moving from the employer to the employee, and while the office is here to stay, it’s likely that the office of tomorrow will be one near unrecognisable to that of today.
What we think
Yanni Toum, Senior AWM Analyst and Team Coordinator at PwC Luxembourg
Many believed that the advent of COVID-19 and the WFH phenomenon would spell the death of the office; it has, in fact, led to the rebirth of the office. As developers and employees increasingly value vibrant, high-tech workspaces, it’s likely that the office of tomorrow will be one near unrecognisable to that of today.
Amaury Evrard, Partner, Real Estate & Infrastructure leader at PwC Luxembourg
While the numbers show that Luxembourg’s office sector has successfully weathered the COVID storm, mounting inflationary pressures, coupled with interest rate hikes and surging material and energy costs might yet again call the future of the office into question —although it appears the sector has so far managed to remain resilient.
