Offices 2020 The future of offices

Bill Page Head of UK and pan-EMEA Offices Research

11 November 2011

REMEMBER THE DAYS OF CUBICLES, CELLULAR OFFICES, AND BEING ABLE TO SMOKE AT THE DESK?

THE WORKSPACE HAS CHANGED DRAMATICALLY OVER THE LAST DECADE – WHAT WILL IMPACT THE OFFICE SECTOR IN 2020?

The Questions

01

Which drivers will be the true enablers for sustainable real estate?

83%

06

What are the key factors that will enable fundamental change in the workplace and what will the office be "for"?

63%

02

What will be more important and why: office location or office quality?

73%

07 07

Where will be the greatest change in location and why? What are the implications?

63% 63%

03

How How will will building building life-cycles life-cycles change change and and what does this mean for sustainable what does this mean for sustainable refurbishment refurbishment and and asset asset management? management?

70%

08 08

How and why will office tenure and the How and why will office tenure and the "landlord/tenant relationship" change? "landlord/tenant relationship" change?

60%

09

Given the challenges faced by real estate, will the industry be able to change? What talents and cultures will be required?

10

How does a strategic "SWOT" analysis look for the industry over the next 10 years and what are the key success factors?

04 05

How might the cost and availability of development funding and finance change and what are the implications for office real estate?

67%

How will new workplace technology impact 67% on building specification and fit-outs?

3

Key Messages The sombre economic context will colour the next 10 years - Expect cost control, prudent Return on Investment analysis and risk assessment

Offices are not dead. This is a myth - Offices will become more important as a place to collaborate and as an investment class

“Middle of the road” product will lose out - Especially in core locations. Polarisation will increase

‘Green’ is the game changer Occupiers will become more powerful - More strategic, better informed, driven by cost and controlling more of the pipeline

Technology will enable change

- It will become more intensive

…Obsolescence will become the major issue - And the industry will be forced to adapt quickly

- But not to the extent some think

4

Focus: Workplace and Specification

WORKPLACE TRANSFORMATION

However, there are fundamental drivers for change

1

Continued cost consciousness: rethinking of workplace an obligatory first step

2

A dearth of quality market solutions: improve the existing portfolio through the creation of agile environments

3

Ubiquitous technological solutions: enable improvements to the flexibility and productivity of the workplace

4

A shrinking talent pool: will make greater and louder demands

5

The workplace as a response to a growing pressure to act sustainably and responsibly

6

Focus: Workplace and Specification The Five Game Changers Electricity: 12V technology rather than 240V

01 Green Technology 02

- Could eliminate raised floors and could bring many older buildings back into play

- Photovoltaic rooftop generation, high efficiency heating, cooling, water usage, waste energy recovery

03

Cloud Computing - Can empty offices of almost everything apart from people. It also engenders flexibility and fluidity in location

Collaborative Technology

04 Mobile technologies 05

- The ratio could shift to 70% social and 30% individual

- Enable core offices to be used more for collaboration

Technology is as much about flexible REAL ESTATE as it is about flexible workers 7

Inhibitors, Enablers and Outcomes Outcomes

Enablers Some opportunities for older product Inhibitors Increasing Importance

Increasing Importance

Management culture Higher energy requirements in specific y b d Reliability and Usability e Lack of built options areas of floorplates t i b i h n i Scale up, scale down: new markets t u b Upfront costs e Cost recovery s u e n i i t t i l n a Longer ROI o c c i t l c l i Data protection a r p Technological advance ge w d n n build s acost Segment (department) overlay ha Higherltbase e C r u New generations at work cu Obsolescence of undesirable stock Sector overlay Green legislation More demands for flexible real estate Cost control

More flexibility to move: churn Lower space requirement: 20% Source: Jones Lang LaSalle

8

Focus: Building Lifecycles

The Obsolescence Issue…

0 6 9 1 e r fo e b s e t a d k c o t ls a i c r e comm

s 0 9 0s 5 53% dates 9 1 m19 o f r r o f m s 6 e 0 t 1 99 9 a d ' na tu r a k c o t s f l o ' refaunrby 59r%ate of rep ishme lacem m r e G n t is 1 e n t an In d 2% p.a .

K U f o % 22

obsolescence is a runaway train 10

Focus: Building Lifecycles

The key drivers are

VALUE

How old will an old office building be in 2020?

01 Green Legislation

Sustainable

02 Work Practices

Sustainability Risk Non-sustainable

03 Technology

Source: Jones Lang LaSalle 2011

TIME

‘95% of unlisted UK and continental European real estate fund managers believe there is a relationship between environmental performance and financial returns. However, the majority felt this relationship was difficult to quantify at the current time.’ Aviva Investors and the Environment Agency Pension Fund (2009)

11

Legislation

Green obligations are likely to shorten building lifecycles 2016 - Energy Act 2018 - Energy Act Illegal to rent out residential or Requires private landlords to accept reasonable requests business premises below minimum for efficiency improvements energy efficiency rating (EPC ‘E’)

2010 Energy Act

2008 Climate Change Act

2010 Changes to Building Regulations Part L

2011 Energy Act

2010 Recast of EU Energy Performance of Buildings Directive

2011 Renewable Heat Incentive (delayed)

2010 Introduction of feed in tariffs (reviewed 2011)

2010 Flood and Water Management Act

2010 Introduction of the CRC Energy Efficiency Scheme Adaptation planning policy e.g. PPS 25, PPS 1 supplement (Due to be updated)

2013 Changes to Building Regulations Part L

2015 Water Framework Directive – environmental objectives for river

2013 2013 All new homes mustofcomply Implementation EU with Code for Change Sustainable Climate Homes Level 4

2011 – National Planning Policy Framework proposed. Includes presumption in favour of sustainable development. 2011 – National Planning

Anticipated smart meters mandate for all new buildings

2020 EU requires new buildings to be “nearly zero energy ” (UK has 2019 “zero carbon” requirement for commercial buildings)

2012 reviewed

2050 80% reduction in UK CO 2 emissions

2020 2 34% reduction in UK CO emissions

2020 15% of energy to come from renewable resources 2050 Emissions from all buildings to be as near to zero as possible Climate Change Mitigation

Sustainability is driving occupiers’ decisions CRE Executive Survey on sustainability

Respondents who think sustainability is a critical business issue Today

70%

2007

47%

Source: Jones Lang LaSalle 2011

13

0%

Source: BCO Survey of 50 CRE stakeholders, 2011

Cellular offices

Business parks

Conversion of other building types into offices

Same

High rise developments

Decrease

Hub/incubator space

100%

Open plan offices

City Centre locations

Mixed Use developments

Refurbishment of Existing offices

Low and Zero Carbon Offices

Workplace Needs are Driving Change

How do you think demand for different types of office space will change over the next decade? Increase

80%

60%

40%

20%

How is the Netherlands shaping up? How much stock has been replaced in the big 5 markets? (Amsterdam, Eindhoven, Rotterdam, the Hague, Utrect)

23.3%

3,500 3,250

29.4%

000 sq m

3,000 2,750 2,500 2,250 2,000 1990s

2000s

Inhibitors, Enablers and Outcomes Enablers

Prime will mean “sustainable”

Inhibitors

Capital Constraints

Increasing Importance

Increasing Importance

Technology

Outcomes

h t i w Management al t Legislation n e Niche developers and contractors n o m i a t d a l nSpeed and lunpredictability s i u f g of change e e Climate change b More conversion to alternativean uses d l l i w e of expertise e c n g e n Lack r a polarisation e in occupier r f Organisational change e e Ch Increasing h r t p e , and value gLack gof evidence/data – ROI on r o preference u t o i Preference rkin obsolete behavMore stockwtoobecome sustainability investments. Management levers

More sustainable investment funds

Rapid devaluation of obsolete stock and Planning stock holders

Restructures and in situ refurbs

Corporate Social Responsibility Source: Jones Lang LaSalle

16

Focus: Landlord & Tenant

Focus: Landlord & Tenant Relationship The importance of property is changing in the eyes of occupiers • Relocation is destabilising and costly - Companies will need to be increasingly certain of the office decisions they take

• Iconic buildings will increasingly be part of the brand • The need to build and operate green buildings - Boards can no longer ignore the need for green certificates and metrics

• Corporate change is coming so fast, that real estate has to be flexible - Fixed assets are being perceived as an increasing strategic risk

• Real estate – particularly leases will have to be flexible - This means shorter

• Property has risen up the corporate agenda and real estate executives are nearer to Board level - The quality of staff in their team has risen as has their strategic reach

Offices will be seen to have a stronger influence on recruitment, retention, performance and productivity 18

Landlord & Tenant Relationship What can we expect? An improved ability to inform developers

9

More demands on the branding of the building

9

More off plan preletting

9

Green leases or at least MOUs

9

Longer leases to facilitate prelets of HQ buildings

9

Shorter leases to maintain flexibility in the rest of the portfolio

19

Inhibitors, Enablers and Outcomes Enablers

Outcomes

Landlords get better at CRM

Real estate culture

re And more shareholder pressure e More branded HQ space m o , c y e g b e t l alonger Healthier balance sheetsShorter for many ilacross portfolio r t leases with w s s y r e for HQs iven b i p u e leases c c r n Less appetite for risk a d Oc n l i u f f r d e n in investment a market value w n poPolarisation o i t Lack of development finance a more of the development l s i g Occupiers control e l Occupier briefs become more detailed

Business fconfidence ar mo

Market Importance

Market Importance

More strategic occupiers

Inhibitors

pipeline Lease accounting legislation

The green agenda

Source: Jones Lang LaSalle

20

Conclusions

Conclusions from Today

01

Technology will change the way we work - but not as much as some people think

02 03

Technology will mean we need less space and can be more flexible in its use

04

Older stock to become obsolete faster – sustainability is the principal driver but not the only one Occupiers will become more powerful and control more of the development pipeline

22

Thank you

COPYRIGHT © JONES LANG LASALLE IP, INC. 2011