The pivot to office-first working
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
Office-first
In our first edition of (Y)OUR SPACE, published back in 2018, we made the point that the tech titans had become important bell-weathers, setting the tone of global office markets. Most were expanding at a breakneck pace, epitomised by Facebook's 600,000 square foot pre-let at King's Cross during the summer.
Conditions have since cooled. Twitter, Meta, and most recently Amazon have announced 25,000 redundancies collectively since the beginning of November. These are household names that receive significant scrutiny - really, the pressure to transform businesses in the face of slowing growth is beginning to play out much more broadly. Labour markets that seemingly defied gravity during the pandemic are coming under real pressure.
This is going to bring a shift in the power relationship between employer and employee, Lee Elliott, Knight Frank's Global Head of Occupier Research writes this morning. Lee anticipates that many occupiers will move to an office-first stance, prompting a steady dilution of the shift towards hybrid working. That's not to argue against more flexible workstyles – the genie is firmly out of that bottle, Lee writes – but rather the pendulum will not swing as far as looked likely a year ago.
Office occupancy rates will move steadily upwards from their current global rates of circa 40% back towards pre-pandemic levels of around 65%. For global office markets that means less downsizing than many had originally anticipated. Occupiers will instead focus on reconfiguring and repurposing the space they hold to support productivity, bolster collaboration and galvanise culture. See the piece linked above for more on what happens next.
People and productivity problems
The UK economy will shrink 0.4% during 2023 as businesses cut back on their investment plans, according to new CBI forecasts out this morning. Growth of 1.6% returns in 2024, the group says.
That's actually rosier than official forecasts. The OBR expects the economy to shrink 1.4% in 2023, with growth of 1.3% returning in 2024. The CBI numbers are predicated on inflation falling to 3.9% by the end of 2023 with the base rate peaking at 4%.
The impacts of the pandemic, inflation and Brexit will all inhibit growth, but the UK has longer term issues that need fixing if companies are going to invest more over the long term, according to CBI Director-General Tony Danker. People and productivity are the problems, he says. The CBI wants a more flexible post-Brexit visa system and tax incentives that would unlock an extra £50 billion in capital investment per year by the end of the decade.
For more on the UK economic outlook, Flora Harley has updated our House View this morning.
Pivot latest..
We've been tracking the various signs that global inflation is peaking and listening carefully for signs that central bankers are becoming more dovish - see Friday's note.
Jobs and wage growth data from the US came in hotter than economists expected on Friday, just two days after Fed chair Jerome Powell suggested that December's meeting might be the time to begin slowing the pace of rate hikes. Futures contracts tied to the Fed policy rate still imply a roughly 70% chance that the Fed will opt for something smaller than the 0.75% hike executed at the past four meetings, but the policy rate is now seen topping out in the 5-5.25% range by May, according to Reuters. Before the report, the policy rate was seen topping out at 4.75%-5%.
Nevertheless, the dollar has now erased more than half of this year's gains amid pretty clear signs that inflation has peaked and China may soon relax its zero-Covid policy (see below), according to Bloomberg's Dollar Spot Index.
Closer to home, "an optimal stopping point" for the Bank of England's rate hikes is nearing and investors are getting ahead of themselves with rate forecasts of 4.5% next year, Swati Dhingra, the Monetary Policy Committee's most dovish member, tells the Observer. “The market is probably underestimating what damage that might cause to the UK economy,” she says.
Zero Covid
Shares across Asia-Pacific rose overnight as China relaxed testing rules in some cities.
This is a small step that many are taking as the beginning of something much larger. Nine of 16 economists surveyed by Bloomberg anticipate that China will begin reopening faster than they had previously expected - four suggested an exit from the zero-Covid policy would happen by the second quarter of 2023, while three see it happening earlier.
Morgan Stanley is now bullish on Chinese stocks. “Multiple positive developments alongside a clear path set toward reopening warrant an upgrade," analysts at the company said in a note cited by Bloomberg.
In other news...
Last week we covered our new forecasts for 25 prime global residential markets. In a new edition of Intelligence Talks, Kate and I dig deeper into the numbers and confirm the markets likely to outperform and those set to see a retreat, listen here or wherever you get your podcasts.
Elsewhere - Help to Buy gets a one month extension (Property Reporter), UK employees to be given more flexible working rights (FT), Europe cuts gas demand by a quarter in bid to shed reliance on Russia (FT), and ambitious plans to build Indonesia a brand new capital city are falling apart (Bloomberg Businessweek).