Commercial Insights - UK offices: a return to work, but not as we know it.
Darren Mansfield explains that few occupational transactions have stalled so far, and that construction is beginning to resume, and questions whether a greater reliance on car travel will help offices outside London reoccupy sooner.
4 minutes to read
What we know
Space remaining under offer, but new enquiries have decreased. Despite unprecedented market disruption, the amount of space under offer outside of London has not dipped markedly. In the South East for example, close to 590,000 sq ft remains in lawyers’ hands. This compares to 567,000 at the same point in 2019. Encouragingly, this demonstrates that there are few examples of withdrawn deals during the pandemic. New enquiries however, have fallen as occupiers take stock of the situation.
Construction sites are restarting. Although the UK government stopped short of forcing building sites to close, many developers elected to stop operations to ensure employee safety. With restrictions now loosening, sites are reopening, albeit materials availability and workforce reduction could affect completion dates. At the time of writing, 8m sq ft is due to complete across the UK cities and South East over the next three years, of which 50% is already let.
"The tight supply landscape and a general flight to quality will mean that headline rents hold firm despite the fall in transactional activity."
What we expect
Return to the office will not mean back to normal. Even after restrictions are relaxed, the return to physical spaces will be slow and gradual. Employees are likely to return to the office in stages and as safety allows. Interaction with spaces will be different, meaning a greater onus on landlord and tenant collaboration. Any strategy for reoccupation will include an assessment of the quantum of space required. Either occupancy will need to be below capacity to allow for distancing or businesses may seek additional short-term space to accommodate this health and safety requirement.
The need for agility will hasten digital transformation. As the forced shift to remote working reveals fissures in business continuity, digital transformation will clearly be a high business priority moving forward. The crisis has evidenced both improved business agility via technological means, and reminded of the important role that technology holds in current and future service delivery. Digital infrastructure, whether at a city or building level, will therefore be a point of differentiation for offices and cities moving forward.
Headline rents to hold firm. The tight supply landscape and a general flight to quality will mean that headline rents hold firm despite the fall in transactional activity. The greatest impact of the crisis will be through a softening in rent-free incentives and lease flexibility.
What We question
Assignment or subletting to rise? Although all focus for businesses currently will be the safe return to work, firms will also be contemplating the workplace beyond Covid19. The aftermath of previous economic shocks has registered an increase in tenant release space. Will the coming months see a rise in ‘grey space’ entering the market or will concern over future supply support the retention of current occupational footprints?
Will commuter method aid business recovery? Following the easing of COVID-19 restrictions, businesses across the UK have been hurriedly assessing how to achieve a safe return to office buildings. Whilst practical steps within the workplace in terms of social distancing, sanitisation and staggering work patterns are achievable, the journey method to work remains beyond the control of individual firms. Outside of London, around 60% of journeys to work are by car. With less reliance on public transport as a means of travel for employees, will this preference enable an easier route to back to the office? Will locations with easy car access such as business parks see a demand increase? What alternative steps will balance sustained or additional car use with emission reduction targets?
What will be the consequences for the green agenda? Prior to COVID-19, ESG integration was rising as the topic of urgent action. The environmental component was of particular focus, with real estate considered as holding a key role in achieving sustainability targets. The ‘Green Agenda’ has not disappeared and is growing in criticality, but fears are that heightened monetary scrutiny in a post-pandemic world will derail some environmental management responsibilities as it has done in the past. Moreover, the pandemic may encourage change with regard to commuting choices. Will local authorities rethink plans to reduce car usage in major cities? How suitable are the proposed walking and cycle lane plans to the daily commute? Will any increase in private vehicle use accelerate the shift to electric?