Commercial Insights - UK Offices: Adapting To A New Normal
May 2020
4 minutes to read
What we know
Transactions have slowed. Unsurprisingly, deal flow has slowed in recent weeks as the practicalities of conducting due diligence have proven prohibitive and the appetite of businesses has reduced. Even so, some leasing deals are still taking place, with firms nervous of not being able to secure space in markets of low supply.
What the numbers say. In the major UK cities outside of London, office take-up in the first quarter was 10% below the long term average at 1.5m sq. ft. In the South East market, take-up was low at 507,000 sq. ft., 37% below the 10 year average. Encouragingly, the amount of space under offer has not dipped markedly. Alterations to lease commencement is being preferred as opposed to complete withdrawal.
Development has reduced but not stopped. With the UK government stopping short of forcing building sites to close, developers across the country have interpreted advice differently. Most have elected to shut down unsure of how to achieve a sensible balance of employee safety and productivity. Those that have continued have largely been operational at reduced capacity.
What we expect
Occupiers: to defer or not defer? With political unrest seemingly behind us, 2020 was meant to herald a period of relative calm, meaning reassured firms would be able to enact longer term space planning. The material change in the market conditions owing to the global outbreak of novel coronavirus however, will mean that many businesses will simply press the pause button with regard to space acquisitions. This deferral is not without business risk. Vacancy rates outside London at the onset of lockdown were the lowest for more than a decade. With the timing of new and refurbishment schemes disrupted, the prospect of reduced choice post COVID-19 restrictions will bolster some occupier appetite toward advancing space plans.
"Vacancy rates outside London at the onset of lockdown were the lowest for more than a decade."
Development: A slow return to activities. Following largescale closure, construction work will begin to recommence as businesses cautiously become more comfortable that the government’s recommendations on social distancing are able to be met. Adhering to this guidance however, will not be the only challenge faced by contractors. Manufacturing units and production facilities of materials required on site have equally been scaled back in response to COVID-19 management measures. This will mean that limitations on ordering and receiving materials could add further delay to construction activity. The expected timings, already under review, may need to factor further slippage.
Financial terms under scrutiny. In the short term, headline rents are unlikely to be subjected to discount in most markets given the tight supply environment. Greater focus therefore will likely reside with securing lease flexibility, extensions to rent free periods and capital expenditure requests. Longer term this picture may begin to shift, with any movement dependant on the scale and quality of space released back to market.
What we question
Will development delivery create an oversupply? A comparison with the GFC, identifies a very different supply picture for UK offices. In the South East for example, vacancy was 7.9% at the onset of the GFC compared to 6.3% today. Between 2009 and 2010, 2.6m sq. ft. of space was delivered driving vacancy up to above 10%. Completions scheduled for 2020 and 2021 amount to just 1m sq. ft. of speculative space meaning that although vacancy will rise the influence of completions on market imbalance will be less pronounced.
Where will new demand derive from? Whilst many businesses take stock of the increasingly challenging environment, the demand pool will of course, be greatly reduced. Nonetheless, many markets outside of London now demonstrate a broader array of business groups than even just 10 years ago. Therefore risk, through any downturn in demand, is reduced. But will any areas of business show growth either through or in the immediate aftermath of the crisis? The obvious candidates for growth are Pharmaceuticals, Life sciences and Technology, all sectors that were having a greater influence on demand before COVID-19. Larger firms within these spheres are likely escalate an ongoing strategy of acquiring complimentary businesses and competitors opportunistically. This in turn will increase the need for more space. Another potential area of growth is ‘On Shoring’. Will the repatriation of operations and supply chains gather momentum? Potentially as business resilience is questioned. If major manufacturing operations return, will the supporting office based functions also need to scale up? Almost certainly.
Digitally agile? Improving business agility was an aspiration for firms long before the COVID-19 crisis, but could a consequence of the current crisis be an accentuation of a pre-crisis trend? In part yes, as a major area of scrutiny deriving from the current situation is the management of operational risk. Digital infrastructure has, in short time, been propelled as the principal foundation of business continuity. Will this mean that cities, districts and buildings that have made infrastructure a priority will carry favour and therefore a premium?