The end of the office? A look at the office landscape after Covid-19
“I spend around £35m on property in a year. I would much rather invest that in people than expensive offices.” Sir Martin Sorrell is one of a number of high profile chief executives in recent weeks quoted in the press championing the benefits of working from home following the Covid-19 crisis. Reduced overheads, greater work-life balance and lower carbon footprints are some of the main reasons why both employers and employees alike are questioning a return to ‘business as usual’ post-lockdown. BGG Real Estate’s webinar “Return, Recover & Redefine – Why go back into the office?” considered what the office environment could look like when we move out of the current lockdown in place and what impact this is likely to have on the office market more generally.
The arguments for office working
The panel recognised the benefits of working from home but also suggested there are strong arguments in favour of a return to office working, including:
- meaningful social connection – businesses are collective endeavours requiring collaboration, strong personal relationships and creativity. The office is a vehicle for developing shared learning and provides a framework for a business culture;
- staff wellbeing - not everyone has a suitable home office environment and balancing work with other commitments such as childcare can be challenging. Working from home can also be an isolating experience and harder for employers to monitor staff wellbeing without regular contact in the office; and
- corporate momentum – face-to-face contact with clients creates trust, which is hard to recreate over video conferencing.
Evolution, not revolution
Karl Taylor of architects Geraghty Taylor considered the immediate, medium and longer-term impact of social distancing rules on a typical office layout and predicted that a return to the office would be on a phased basis. Businesses will initially focus on the changes required to existing arrangements to ensure the safety of employees (for example removing desks and implementing single flows of traffic) and to facilitate a cautious return of those employees whose role requires them to be in the office.
Occupancy levels are unlikely to return to pre-lockdown levels as businesses adopt a hybrid approach between home and office working and the physical layout of offices is likely to be permanently altered to accommodate social distancing. Consequently, the purpose of the office space is likely to shift to a hub for collaborative working, training and team building with work that can be done individually carried out at home.
Impact on the market
Tom Boggis of BGG Real Estate considered the impact of these changes to the physical office environment and tenant’s needs on the real estate market.
- Amount of leased space – due to the greater space required to accommodate social distancing, fewer people in the office does not necessarily mean less office space in the short term. The amount of space required will eventually depend on the approach taken by businesses to phasing staff in and out of the office.
- Effect on lease terms – future leases will need to incorporate greater flexibility for tenants as they look to minimise risk. New lease terms are likely to be shorter and tenants under existing leases will look to use break clauses to re-gear their leases (for example by requesting an additional rent-free period).
- Fit out costs and write offs – shorter lease terms mean tenants will need to write off fit out costs over a shorter period of time. To attract tenants in a competitive market landlords are likely to continue to offer enhanced Cat A+ fit-outs instead of the more basic Cat A and perhaps even offer furnished premises.
- Effects on rents and capital values – a combination of wider economic uncertainty, potential higher levels of unemployment and lower demand will likely lead to a softening of rent and widening of tenant inducements on offer. Conversely, the cost of running offices is unlikely to reduce due to the measures taken by landlords to enhance their spaces in order to attract tenants and service charges are likely to increase, for example, to reflect increased cleaning requirements. The economic uncertainty will likely negatively affect capital values particularly where there is letting and covenant risk.
- Serviced offices – some tenants will return to more traditional leases due to a desire for greater control over their physical environment and safety of staff. Offerings such as co-working which rely on shared, communal areas are likely to see a reduction in demand. As a result the small office sector could see a boost as corporate occupiers seek to let smaller areas of secure office space for their staff.
There can be no doubt that the great national experiment of working from home has changed the office sector and will accelerate some trends that had already started to emerge. Simultaneously, the experience of days spent on Zoom will leave many yearning for a return to face-to-face interaction. Landlords will need to increasingly view tenants as customers and look to optimise the offering of their space and services to meet occupiers’ property and digital requirements. Those that accept this challenge and proactively collaborate with tenants to reflect the evolution in what offices are now being repurposed for will be best placed to face any future headwinds.