Strategic Engineering

Case Study

Evaluating the Impact of Flexible Offices in Coping with the Uncertainty in Future Demand

Claudio Martani, Noemi Fiorot, Andrea González, Bryan T Adey, Joris Van Wezemael
November 28, 2023
Flexible office designs, analyzed with a real options methodology in a Zurich office building case study, show a 492.2 million CHF potential benefit. Designs featuring movable walls and independent technical elements can convert vacant spaces into co-working and residential units, maximizing occupancy and reducing vacancy risk by over 70%.
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Key Idea Description

Performance Optimization of flexible office spaces in Zurich, exploring economic viability and strategic development flexibility in a multi-storey mixed-tenant office building. The study analyzes the impact of incorporating design flexibilities to adapt to fluctuating demands for office space over an extended period, focusing on maximizing profitability and operational efficiency through dynamic design adjustments.

  • Broad Area: Infrastructure, Real Estate, Apartments, Office Space, Co-work Spaces, Profit Maximization, Design Adaptability, Switzerland.
  • Main issues of case: Development of design flexibilities, timing flexibility in design adjustments, coping with fluctuating market conditions, and accommodating various stakeholder preferences to ensure economically viable office space configurations.
  • Main analytic topics: Real Options Analysis to assess economic implications of flexible designs, descriptive modeling to understand decision-making processes, and stakeholder analysis to evaluate the impacts of design choices on different parties involved in the real estate sector.

Insights

  • Flexibility in office space design, particularly through features like movable walls and parceled technical elements, proves optimal for stakeholders in mitigating uncertainty in future demand, highlighting the strategic advantage of adaptable infrastructure.
  • The real options methodology effectively models uncertainty in office space demand and provides valuable insights into the long-term effects of flexible design decisions, offering a systematic approach for stakeholders to make informed decisions in optimizing building designs.

Training

Relevant lectures:

  • Paradigm change in engineering systems and planning
  • How to optimise design and decision-making under uncertainty
  • How to manage the design process

Gallery

  • example-of-commercial-property
  • Interventions-T2-to-trigger-based-on-the-technical-element-layout
  • Comparison-of-the-different-designs-cumulated-probabilityComparison-of-the-different-designs
Abstract
The potential growth in working from home poses a large uncertainty in the future demand for office space. Flexible offices can help limit the negative effect of this uncertainty by allowing future changes in use. To ensure that the investment in flexibility is proportioned to the risk that it minimises, the real options methodology is used in this work for modelling the uncertainty in future demand for office space and estimating its effect on stakeholders in the long term. The methodology is tested on an example of a multistorey mixed-tenant office building in Zurich, Switzerland, for which ten designs are proposed and the triggering logic is modelled. The designs have various degrees of flexibility, and the triggering logic mimics the decision criteria of an owner. The results show that under the investigated circumstances, a flexible design with movable walls for enabling periodic conversion of the unrented office space into co-working spaces, and with parceled technical elements to allow the conversion of long-unrented office space into residential units, is the optimal decision for all involved stakeholders over the building life. The authors draw conclusions about the strengths and limitations of the real options methodology in this context and envision future developments.

Summary

Introduction to Evaluating the Impact of Flexible Offices

The study addresses the challenge of evolving office space demand by exploring the potential of flexible office designs. Based on a hypothetical multi-story building in Zurich with 16,218 square meters of office space, the research evaluates the adaptability of office spaces to the increasing trend of remote work.

Understanding the Project’s Scope

The project scrutinizes ten different office designs, each incorporating varying degrees of flexibility to adapt to future changes in workplace requirements. The aim is to ensure that the building can evolve in response to shifting market demands and work patterns.

Real Options Methodology

Using the real options methodology, the study quantifies the financial benefits of flexibility by modeling various office space configurations as investment opportunities under uncertainty. This strategic approach helps determine the most economically viable design throughout the building’s projected lifecycle.

Economic Analysis with Discounted Cash Flow (DCF)

The Discounted Cash Flow (DCF) analysis is pivotal in projecting the financial viability of each design. It calculates the present value of expected future cash flows from potential leases and sales, essential for guiding investment decisions. The analysis assumed rents at 347 CHF/m²/year for traditional office spaces, between 867 to 984 CHF/m²/year for co-working spaces, and 461 CHF/m²/year for residential units.

Flexibility Analysis

Flexibility is a cornerstone of the project’s designs, featuring movable walls and modular spaces that can be converted between office, co-working, and residential uses depending on market demands. This adaptability aims to maximize space utilization, occupancy rates, and economic returns, particularly given the maintenance costs—76 CHF/m²/year for traditional office space, 340 CHF/m²/year for co-working spaces, and 80 CHF/m²/year for residential areas.

Monte Carlo Simulations

Engaging diverse stakeholders, including property developers, tenants, and city planners, ensures that the development aligns with broader urban development goals and community needs. This inclusive approach is vital for the project’s acceptance and successful integration into the urban landscape.

Stakeholder Engagement

Multiple stakeholders are involved in the project, from investors and city planners to local businesses and residents. Engaging these groups through regular updates and feedback sessions is crucial for aligning the project with community needs and expectations.

Utilizing Residual Value Calculations

The project also considers the residual value of the development—its value at the end of the analysis period. This calculation helps understand the long-term worth of the project beyond the immediate development phase, factoring into overall financial assessments and strategy planning.

Conclusion

The study on flexible office spaces exemplifies the use of sophisticated simulation techniques and economic models to effectively navigate the complexities of real estate development in a world where workplace dynamics are rapidly evolving. By incorporating methods like real options, DCF analysis, and Monte Carlo simulations, and emphasizing flexibility and stakeholder input, the project sets a new standard for future urban office developments, ensuring adaptability, functionality, and financial viability.

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