Occupational hazard: Post-Covid-19 public sector estate strategy

20 Apr 22

Many believe that the public sector could operate with far lower levels of office space. But does selling off buildings present a risk?

The rapid rise of homeworking has created a chance to rethink the use of office space across the public sector – saving money, cutting emissions and promoting more creative and collaborative ways of working. When the pandemic hit, public sector employees around the globe were part of a sudden – and surprisingly successful – shift to remote working. Workforce transformation on a scale unimaginable pre-Covid-19 has, within two years, made the Monday-to-Friday office culture not just unnecessary but anachronistic. So what are the benefits, risks and practical implications of downsizing, and do public bodies around the world even need office space to operate?

“All organisations, irrespective of whether local authority or corporate, are recognising that hybrid working is probably here to stay in some form,” says Wayne Butcher, director of public services advisory at accountancy firm Grant Thornton. “It just makes business sense to assess whether we need all that space and [whether there is] a way of rationalising it to release savings and see an impact on the bottom line.” The pandemic proved that the public sector was capable of wholesale workplace transformation, says Ed Roddis, head of government and public services research at accountancy firm Deloitte. “It had to become more agile, more fleet of foot. It had to reassess risk appetites,” he says.

The benefits of hybrid working are clear – more efficient use of real estate, wider access to talent, and working environments that promote collaboration, innovation and employee wellbeing, says Roddis. To achieve transformative change, the public sector must “lock in” the boldness that characterised its initial response to the crisis. “One of the risks is doing nothing and drifting,” he says. “There is a sense that the next year could define what the future of working in government offices looks like, because the decisions that are made could set the pace and the tone for years to come. Public bodies and companies alike need to keep pace with the times to be a good employer and to be an effective part of the wider ecosystem in which they live.”

Complex endeavour

Judith Amoils, a Toronto-based consultant specialising in public sector real estate and asset portfolios, believes there are financial savings to be made from new ways of working, as well as important benefits from attracting and retaining staff. However, she warns that modernising the public sector office portfolio is “a very complex endeavour”, not least because it can be constrained by the ownership of flagship iconic buildings, such as historic town halls. These often require vast injections of capital investment to function effectively as workplaces.

“They are expensive, they are dilapidated, they are rusted out and they are functionally obsolete,” she says. “There is a whole series of issues related to building condition and lack of real estate capitalisation funds and an enormous need to protect public assets, [which are] often assets that the public feels very strongly about. Aligning all of this in the public sector is way more complex than it is in the private sector. While the drivers are very similar, the way the problem unfolds – and the solutions – look very different.”

John Burnside, head of property at CIPFA, says that local authorities, as “custodians of place”, must also weigh up the economic and social implications of, for example, closing buildings in town and city centres. “You are looking to balance the economic savings that come with disposing of offices with mitigating the negative impacts that might cause… because public sector offices do play a part in the lifeblood of the local communities in which they sit,” he says. “Save money, yes, but keep sight of the potential social cost.”

When it comes to managing a real estate portfolio, messaging is critical – attempts by a local authority to regenerate a moribund local economy could be undermined if it pulls out of a town-centre location.

“The downside of reorganising office space [is that] it might not align to some of those broader economic objectives an area might have,” says Butcher. “If the local authority has indicated doubts over whether it wants to be there, it does not send a great message for trying to attract investment.”

Flexible working

According to Roddis, public bodies must think through the impact of flexible working on their ability to retain existing staff and attract new talent from a wider geographical area while ensuring that service standards are maintained. There may also be implications for the local growth agenda – moves that were under way by governments in the UK and New Zealand to relocate civil servants out of capital cities are now being complicated by the question of whether public servants need to be in offices at all. “There are a whole bunch of tensions to balance in making decisions around these things,” Roddis says. “You do not want to make these decisions in haste, because of the uncertainty [and] a sense that we want to see how this thing plays out.”

Organisations will, in any case, find that their room for manoeuvre is limited if they are locked into private finance deals or long-term leases, although leaseholders might be able to renegotiate a new agreement with their landlord that suits both parties. Flexibility is increasingly being built into the use of public sector assets to reflect the trend towards joint working. In the UK’s capital city, the site of the former Royal London Hospital is being transformed into a new town hall, which will accommodate not only the London Borough of Tower Hamlets but also organisations including the local clinical commissioning group.

According to Roddis, public sector leaders around the world are taking a wait-and-see approach, watching closely to see how early hybrid models pan out. Significantly, he finds that international colleagues are calling him to find out what is happening in the UK. “Most governments and countries around the world see the UK government and public sector as being at the leading edge – which it is,” he says.

“Investor sentiment has improved considerably since the depths of the pandemic, and well planned and executed asset disposals will aid local authorities in achieving their financial and sustainability goals” John Burnside, CIPFA

He attributes that partly to the head start in digital transformation gained by the UK since the creation of the Government Digital Service more than a decade ago. “From that point on, the UK has been seen as being on the front foot on the digital government agenda,” he says. While the US has struggled to gain traction because of historic issues in the management of federal real estate, the UK has been able to adopt a “very progressive” approach to its public sector portfolio, says Amoils. “The UK has been very thoughtful about publicly owned office space and how it can be used,” she adds.

Amoils, who carried out a comparative review into how different jurisdictions have grappled with this issue, found that Europe is generally ahead of North America when it comes to workplace innovation. She cites portfolio modernisation across the public sector in the Netherlands, which benefited from an established culture of remote working pre-pandemic as well as almost universal high-speed internet access.

 


Toronto transformation

The pandemic has fast-tracked ambitious plans to migrate City of Toronto office employees to a hybrid model of working. Canada’s largest city is accelerating proposals to overhaul its office portfolio – modernising workplaces, generating savings and improving its environmental footprint.

The modernisation programme was boosted by a survey of city employees during the pandemic, which found that 95% wanted to continue working at home for at least part of the week. A plan developed at the end of 2020 would see almost 15,000 office workers deployed across 15 locations, compared with the current portfolio of 55 leased and city-owned properties, reducing office floorspace by a third, or one million square feet.

The city expects to make annual savings of CA$30.5m as a result of reduced operating and maintenance costs – or CA$2,100 per employee in workplace accommodation costs – and an annual return on investment of 12%. An investment of CA$225m will renovate primary office facilities and fund business transformation.

The programme will free up eight properties, generating an estimated CA$450m in land value, which can be leveraged for city building purposes, including housing, community and environmental initiatives.

The city says the programme will bring other benefits, including reduced greenhouse gas emissions, improved talent attraction and retention, better employee engagement and opportunities to increase accessible public and community space.

“The focus on employee mobility and the redistribution of office capacity outside the downtown core… will also reduce commute times and frequency, contributing to the reduction in greenhouse gas emissions as well as improved work-life balance for employees,” it adds.


Nimble solutions

New Zealand, too, has taken advantage of its small population to develop nimble solutions, cutting across traditional public sector silos to adapt to new models of working. The Christchurch Justice & Emergency Services Precinct, for example, hosts multiple government agencies, including the Ministry of Justice, New Zealand Police, the Department of Corrections, and Fire and Emergency New Zealand, in a single purpose-built location.

And the appetite for change is clearly growing across central and local government in the UK. A survey carried out by PWC last year found that 57% of public sector organisations planned to reduce their office footprint, with three-fifths of those envisaging a reduction of between 11% and 30%.

According to Whitehall’s annual State of the Estate report, the move to hybrid working will be reflected across the central government office portfolio in the next two to three years as leases expire and asset management decisions work through the system. Meanwhile, West Berkshire Council last year predicted net savings of £185,000 from closing two offices and offering staff a bonus to work from home. Separately, Cornwall Council is relying on the growth of homeworking to shrink its office footprint from 200 buildings to just 50.

The biggest challenge may be disposing of assets profitably in the current climate – a problem that could be exacerbated by a potential influx of surplus buildings in areas undergoing local government reorganisation. Public bodies will need to combine innovative approaches with careful planning to achieve economically and environmentally efficient solutions, says Burnside. He believes that colocation, repurposing and disposal programmes, if well thought through, can drive town-centre renewal without flooding the commercial property market with stock. “Investor sentiment has improved considerably since the depths of the pandemic, and well planned and executed asset disposals will aid local authorities in achieving their financial and sustainability goals,” he adds.

CIPFA research on effective management of public sector assets in response to new ways of working is due to be published later this year.

  • Kerry Lorimer

    a freelance journalist who specialises in Scottish public finance and policy 

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