BLM office market report: what will happen to all those big empty buildings if we all stay working home?

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Paul Williams

With many businesses now operating a remote working model, what happens if they decide to stick with this approach; and what will happen to some of the prime real estate across UK cities?

Will it sit vacant or could it be used to help growing businesses find space? BLM spoke to two property experts to try and find about this and how the office market is being affected by Covid-19. 

Paul Williams, who is a Director at Avison Young, comments: “Understandably, companies of all shapes and sizes are reviewing their office space needs in the light of the coronavirus pandemic and the lockdowns which many countries have imposed in response. Phrases such as ‘social-distancing’ have entered our vocabulary, and we are all now dedicated Zoomers, gaining intriguing ‘through the keyhole’ style insights into the homes of our colleagues and peers.

“Business leaders such as Jes Staley, the Chief Executive of Barclays, and James Gorman, the Chief Executive of Morgan Stanley, have both expressed a view that their real estate needs are likely to be significantly down-scaled in the future, as home-working and a dispersed office network potentially take the place of the large corporate headquarters offices of today.

“When the lockdown is relaxed, we are likely to see changes to both our working practices, as well as adjustments to our workplaces. This may include continued remote working, or a partial return to the workplace incorporating modified schedules or shift working. There will likely be a general desire to avoid crowded public transport, so in the short-term commuting by car, motorbike or bicycle is likely to increase. Some people will avoid their previous commute by working from suburban or branch offices outside city centres or utilising local flexible/serviced office providers.”

Paul continues: “At least temporarily office occupation densities will be reduced, initially managed by seating policy and behaviour rather than more expensive desk reconfiguration. Video calls will continue to replace many meetings and most business travel.

“In the long term, despite the comments from Barclays and Morgan Stanley, we don’t necessarily foresee a wholesale reduction in the amount of workspace occupied by most businesses. Homeworking is only a viable option for a small proportion of workers, and for many people the lack of normal social interaction is one of the main things they have missed about working in an office environment.

“It can be harder to maintain morale and team spirit when people are working remotely, in addition junior members of staff will miss out on the one to one training which is vital to learning the soft skills which most roles require, in addition to technical knowledge and competence.”

On the implications of some businesses decided to down-size, Paul comments: “If some organisations do decide to down-size their office footprint, this may not be easy to do in the short term as they will be tied into leases with fixed expiry dates or breakpoints. Over time however we could see a percentage of the office stock coming to the market, and as always, the speed with which this is absorbed by other occupiers will depend on factors such as location and quality, with the better specified and located buildings likely to be snapped up by companies who may have previously struggled to find space in prime locations.

“Avison Young research for the Big 9 quarterly report on the regional office market suggests that the strong fundamentals in many of the markets will likely provide an element of resilience during and after the current pandemic. Vacancy rates are currently at historic low levels, and half of the current stock under construction in the Big 9 markets is pre-let.

“Whilst many occupiers may seek to reduce the headcount in their offices by introducing increased agile working and some form of rota system, any drop in the number of desks occupied will be offset at least in part by the need to maintain greater social distancing, and people are likely to be wary of hot-desking at least until the pandemic is over.”

On expected growth or decline in the serviced office sector going forward, Paul says: “We expect to see further growth in the serviced office sector as companies seek to manage and flex their office requirements going forward, and as a means to lease vacant space if there is a down-sizing as some large corporates seek to reshape their office portfolio in the light of changing work patterns.

“Smart organisations, smart buildings and smart cities that can effectively harness data and technology to monitor, manage and minimise the risks for individuals will be at a clear advantage, and we can expect to see an explosion of innovation in these areas over the coming months.”

To find out about how the office markets are being affected by Covid-19, BLM also spoke to John Bryce, a director and co-founder of Birmingham’s largest independent property agency, KWB

A close observer of Birmingham’s property scene, he has dismissed predictions that urban office markets will be changed forever by the Covid-19 pandemic.

Some pundits believe transformation lies ahead, and that the ‘new normal’ will be unlike anything previously seen as occupiers switch to remote working in their droves.

But John disagrees. He says: “I’ve been working in this industry for 40 years, and it’s certainly not the first occasion when the market has been brought to its knees, but however much economic damage is wrought in the short-term, I don’t believe the fundamentals will have changed once lock-down fully ends,” he says.

“Inevitably, very few people are inquiring about office space and existing tenants are seeking to renegotiate their lease terms and conditions, and of course the serviced office sector has been very badly hit.

“We’ve already seen the market leaders, WeWork, sue Japan’s SoftBank for pulling out of a $3bn deal to take full control of its business, and others in that sector are having ‘conversations’ with their landlords for either deferrals or holidays for rent and service charges.”

Bryce thinks that as business models evolve during lock-down, some tenants in traditional office space are likely to dedicate their meeting rooms and conference suites to office use to achieve better social distancing.

“Serviced operators could then also benefit from letting out their meeting rooms, on an hourly basis, to these traditional office users whilst their own meeting rooms are out of action,” he says.

Although the KWB team has become avid users of Zoom and other video-conferencing apps during lock-down, Bryce does not expect that remote working will replace traditional office environments when the crisis ends.

He comments: “There’s no doubt that some companies looking to reduce their overheads, because their finances have been crippled during lock-down, will in future make greater use of technology, and that some of their employees will continue working from home.

“Equally, we’ve seen times when home working has been particularly in vogue, but then the appeal of working in a traditional office resurfaces.

“To me, an office provides a collaborative environment, and helps organisations and employers deliver a sense of unity and purpose, which is inevitably missing from a home office.

“We will certainly see occupiers in traditional office space seeking increased flexibility in their leases, allowing them to reduce their overheads more quickly in the event of future recessions, and landlords can expect to see lease break demands to be more frequent

“Naturally, they will want to resist such changes, as it will affect the investment value of their properties, but if they want to compete with the serviced office world, then more flexibility is something they will need to swallow.”

After the crisis, Bryce accepts that demand will tumble for serviced offices in the short-term, as potential occupiers rebuild their finances, but is convinced that the sector’s ability to supply quality space and ICT, and on short-term leases, will see it steadily recover.

He concludes: “I suspect too that the serviced office sector will attract tenants from traditional space, especially if landlords are unwilling to accept occupiers’ needs for greater flexibility,” he says.

“Across the piece though, and regretfully some businesses will fail to survive, I see changes ahead for our office markets, but certainly neither the catastrophe, nor the cataclysmic changes, which some are forecasting.”

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