The Evolving Relationship Between Real Estate and HR Functions in a Hybrid and Remote Work World

Flex Index

The relationship between HR and Real Estate has steadily evolved in recent years, with an increasing focus on how office space design and location impact employee well-being, productivity, and retention. The growth of hybrid and remote work has elevated real estate and workplace flexibility decisions to the C-suite level like never before. In our Flex Perspectives podcast, we sat down with Phil Kirschner, Senior Expert and Associate Partner at McKinsey, to discuss three crucial trends every real estate and people leader needs to know.

Trend 1: Real Estate is Increasingly Reporting into Human Resources

Traditionally, Real Estate has typically reported into Finance or cost management functions, particularly in industries that deal with physical goods, such as supply chain and logistics. However, more and more companies, even those in surprising industries like consumer goods, are beginning to view Real Estate as an employee relations event rather than just an asset.

Newly forming roles – such as Head of Employee Experience, Head of Dynamic Work, and Head of Remote – reflect the increased blending between people and place. This shift in thinking is starting to lead some companies to shift Real Estate to report into the People function. This will undoubtedly shift the key metrics that both HR and Real Estate leaders are evaluating to determine the effectiveness of their people and place strategy, as well as require new skill development on both sides (e.g. HR leaders becoming more fluent in project-based budgeting).

Trend 2: New Metrics at the Intersection of Real Estate and Human Resources

Real Estate and Human Resources have always worked closely together. As Phil Kirschner explains, “Any workplace strategist worth their salt would have told you years ago — and still would say now — if you want to get this project done, this new way of working, whether it's a whole portfolio or one site, you're going to need a committee of people working together. That is primarily a three-legged stool. It's always HR, Real Estate, Finance – those players were always working together."

But with the growth of hybrid and remote work, Real Estate and Human Resources are no longer just collaborating; rather, they are having to rethink metrics to measure success.

Traditionally, metrics to measure Real Estate have skewed heavily toward efficiency. New metrics are starting to become commonplace that reflect how effective the space is in driving employee visits, as well as the quality of the experience the employees have while in the office.

Phil identified a few metrics he is seeing become more common:

1. Average number of visits/period of time, with specific breakouts for different groups within a company
2. Average cost per visit, which takes into account the fully loaded cost of the site over a certain period of time vs. the number of visits that take place over that period
3. Experienced density, which takes into account how full the office feels based on square footage vs. the number of people typically in the office

These new metrics start to provide a more nuanced understanding of the impact of physical workspaces on employee engagement, experience, and business performance.

Trend 3: Embracing Scarcity in Office Space

Traditionally, Real Estate leaders feared running out of space. Investing in new offices was time consuming and required a lot of forward thinking.

Hybrid and remote work – along with the rise of flexible, serviced, and co-working spaces – have flipped this concern on its head. Offices running nearer to full capacity represent an opportunity to create more energy in the space that ultimately will be more attractive to employees than a half empty office. The plentiful availability of short term spaces – and the fact that employees aren’t in the same office together everyday – allow for a smoother transition from space to space.

Phil describes the transition with an analogy to race car performance:

“It was always a scarcity mentality. What if we don't have enough space? And this was even when peak daily utilization might have been in the 80s percent. But even then, scarcity was really scary because getting more space could take years. So we'd be conditioned to stay very far away from the red line. But at WeWork and other community-oriented workplaces, I think they'd all say that living at the red line is when the interesting stuff happens. Race cars perform best, or you find out how to make them perform best when they're at the red line.”

Summary

In conclusion, these three trends indicate a shift in the way leaders view Real Estate and workplace management. By recognizing the importance of the physical workplace as an employee relations event, integrating human capital measures into Real Estate evaluation, and getting comfortable with scarcity, companies can create a more nuanced understanding of the impact of physical workspaces on employee engagement, experience, and business performance.

Additionally, the age of remote work has forced leaders to evolve the traditional office space design to create a vibrant and purposeful atmosphere. As companies continue to navigate the complexities of returning to the office, these trends will be instrumental in creating a workplace that meets the evolving needs of both employees and businesses.