Scenario thinking is a widely used strategic planning tool following the financial crisis of 2008. Scenario thinking is a group activity which aims to reduce cognitive biases associated with management decision-making. By exploring a range of extreme, but plausible, scenarios an organisation implements the processes which allow it to adapt to change. The impact of change over the past century is illustrated by organisation survival rates. General Electric is the only company listed in the Dow Jones Industrial Index that was also included in the original index in 1896.

Royal Dutch Shell is credited with commercialisation of the scenario thinking technique in the 1970s. One scenario assessed the impact of oil price shocks on the Royal Dutch Shell business. Not only was this scenario plausible, it eventuated when the 1973-1974 oil crisis occurred and crude oil prices spiked.

Jones Lang LaSalle Australia undertakes scenario analysis on our office market vacancy rate projections. Our scenarios typically provide a range around a vacancy rate projection. For example, we project the Sydney CBD vacancy rate will be 8.5% in 2016. However, the lead indicators for demand are starting to firm and stronger demand over 2015 and 2016 could push vacancy towards the 6% mark.

While this is a valuable exercise for clients, scenario thinking proponents will argue that the technique differs from our vacancy rate scenario analysis. Scenario thinking considers the impact of long-term structural changes on an industry or organisation, while our scenario analysis on vacancy rates looks at sensitivities around short-to-medium-term forecasts.

A more extreme scenario exercise might be to assess the long-term impact of changes in workplace strategies or technology improvements on the long-term demand for office space.

Activity Based Working (ABW) is viewed as having a long-term impact on office demand. Assuming ABW enables an occupier to use less space, workspace ratios compress and the underlying demand for space is structurally lower. While this is a plausible scenario, it is also a naïve scenario. The optimal size for a tenant to embrace ABW is 3,000 sqm. We estimate fewer than 50% of tenants in the Sydney and Melbourne CBDs require more than 3,000 sqm. Any long-term impact of ABW should only be assessed on this cohort of the market.

Technology improvements enable workers to operate outside the traditional office environment. The rise in people working from home in Australia, however, is a myth. The Australian Bureau of Statistics reported that 4.8% of Australians worked from home on Census night in 2006 – a figure that fell to 4.4% on Census night in 2011.

Nevertheless, we expect that the adoption of ABW and a rise in non-traditional working methods will have some impact on the long-term demand for commercial office space. However, neither scenario will lead to the office market equivalent of the 1970s oil price shock.

The investment horizon for core real estate is typically in excess of seven to ten years. The long investment period for commercial real estate, therefore, makes scenario thinking a viable tool as part of the investment process.

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