Business Leader brought together seven industry experts for a debate about the UK offices sector, and to assess current take-up levels, inward investment, and mixed-use developments.
Panel for the debate
• Hayley Blacker: Director, Interaction
• Dr Walter Boettcher: Head of Research & Economics, Colliers International
• Richard Bonner: UK Commercial & Operations Director, Arcadis
• Jo Charles: Head of Sustainability, Willmott Dixon Construction
• Tom Morris: Managing Director, CBRE
• Toni Riddiford: Head of Office & Workplace, Stride Treglown
• Sarah Trahair-Williams: Associate Director, Cubex
Does the pandemic represent a threat to UK offices? And how do you assess the outlook for the commercial property sector?
Dr Walter Boettcher: “If you read the press, you might think so, but I do not think so. Computers were meant to do away with paper in the 1980s but office paper consumption is up by 80%. I believe the same will happen with office space.
“Some trends we are seeing though is that the pandemic has accelerated flexible leasing and back officing plans for many businesses. I would also say that the ESG and sustainability agenda has been given a shot in the arm over the last year and the sensitivities around the workplace have changed forever.
“Let us not write off the sector though, as real estate is only down by -1.5% compared to finance, which is -2.3% and hospitality, which is down by 50%. It has been resilient and office rent collection has held up too, with 92% collected in 2020 in London and another five per cent in payment plans. Regional rates outside of London are even better, with 98% collected in 2020.
“Finally, if we can get renewed confidence on the transactional side and not just the occupier side – and this will come from investor confidence – then we will also be looking at a sector moving into growth territory next year.”
Tom Morris: “Of course, it has been a difficult last year for the office market and the big question now is how much office space do people want? I am optimistic on this front, and whilst a new way of working will be here to stay, many companies will still require office space. Just look at Google who will now be welcoming back 60% of its workforce back into offices, for a three-day week.”
Hayley Blacker: “I am also optimistic and what I am seeing in the office market is that smaller to medium-sized businesses are confident about returning and their teams want to come back into an office. Yes, that’s going to change with quieter spaces, less desks and different design choices and fit outs, but it’s happening.
“Corporates and larger businesses are a bit more hesitant though, and they are still deciding what they will do with their space; but I believe in the long-term, many will keep their office space. I would also end by saying that landlords are starting to look at their portfolios now.
“Landlords are also looking at their portfolio and seeing how they can adapt their office space to be built better and embrace sustainability and wellbeing.”
Toni Riddiford: “I am still seeing long-term confidence in the viability of offices as a physical space, albeit in a different form and with hybrid-working in mind. Workers are generally looking for a split between the office and home, but this needs to be balanced against what each business needs.
“Certainly, with office space I am seeing a raising of standards and an acceptance that good is no longer good enough. Furthermore, if attendance to the office is no longer the default, then we need to find out about the space around offices too and how these can be made even better.
“Mono-functional locations are likely to be challenged too and the most successful destinations will be flexible and have choice.”
What role will multi-use and mixed developments play in the future regarding the office sector?
Sarah Trahair-Williams: “Mixed-use developments hold the keys to bigger and more successful urban centres because there is an increasing appetite from all generations to live, work and play in central areas without a car.
“The recent high court judgement for Sports Direct and Mecca – demanding that rents accrued must be paid – is interesting too as retailers will need to decide on whether they continue, and this could see retail assets that will need to be repurposed and this is where development opportunities lie.
“Finally, I would also say that as a broader point we need to ensure we do not just push the new homes agenda and we need to factor in commercial property and mixed-use development space because the office is not dead and there will be a requirement for office and retail.”
It has been touched on but what practical action is being taken around the sustainability agenda?
Jo Charles: “The built environment accounts for 40% of carbon emissions globally and 11% of this is coming from the construction of buildings and 28% from the running of the buildings. This shows what an influential role the sector can play and to bring these numbers down, we are now seeing leaner construction methods and some construction methods even being taken offline.
“Using local providers is also becoming more prevalent and questions are being asked about supply chains and the performance of buildings and products. Investors are playing close attention too and they are backing projects that meet certain sustainability criteria, and they are demanding more from developers.”
How is inward investment into UK commercial office space holding up?
Walter: “As you would expect it has been down, and this is not just because of Covid-19 but because of Brexit before it too. What will be key to attracting inward investment into the commercial property sector will be mixed-use developments and the build to rent sector.
“We do not just want to overbuild residential though, and cross border investors are aware now that if there is a mixed-use development that has some residential, some office space and some retail or leisure or industrial storage – it has the capacity to mitigate risk in their investment portfolios, which makes them desirable investments.
“Return on a residential and commercial real estate mix has been running on 4%-7% per year, but the volatility has been nil. Compare this to industrial volatility, which has been high, for example. Mixed- use and re-purposing of assets preserve economies of scale by clustering certain activities, which is why they are attractive for investors.”
Richard Bonner: “Inward investment will be driven by the growth of the regions, and there is a clear government agenda to support areas that are considered to have been left behind too. Each region must create a compelling offer though, as to why they should attract inward investment, and there needs to be a very clear plan for collaborative public and private sector investment.
“The right industrial strategy is important too, to ensure businesses will invest. I also want to point out that a client of ours, called Henderson Asset Management, has just signed off on 90,000 sq ft of office space in the heart of London. This is underpinned by a strong business case for good office space and a sign of future intent.”
Tom Morris: “Transactions into the office market stands at £4bn for the last year, which is 30% down on the last five-year average. This is because people have not been able to move around and it has been hard for investors as they have not been able to travel to the UK, so this has, of course, impacted investment into the UK property sector.
“There is also currently some barriers to getting deals approved by investment committees because of rent moratoriums, but this will start to unlock and the certainty that investors need will come with it.”
Regarding rental rates, how have they been holding up?
Tom Morris: “Better than expected as we anticipated we might see a drop in headline rents, but this has not happened across the major cities. Take up levels were of course down, with London at 55% and the South East at 30% for example as occupiers were unable to make business decisions and renewed current leases.
“This was not because of an unwillingness to move and invest, but a statement that they will not be doing so now but potentially in the future.
“With cities that have constricted supply like Bristol, take up has only been down by 14%, so this has helped rents to stay steady.”
What are the major threats to the sector in the future?
Walter Boettcher: “All I am hearing and seeing is opportunity and we have been hampered from pushing these agendas, first because of Brexit and now because of the covid pandemic. But I feel that we are on the cusp of a big generational change. I recall a couple of other times in history when we were meant to change but we didn’t, but this feels different.”