Life after COVID-19 will be savage for poor-quality office space
March 2021 | Insights
Hands up if you had “accelerating trends” as the phrase of 2020?
For my sins, I ventured into the clairvoyance game in Lockdown 1.0. I contributed to the deluge of office market predictions by suggesting that the new norm would probably be occupiers wanting slightly smaller, better offices. I even mentioned ‘the death of the office’ – how embarrassing.
However, the prediction was not rocket science nor, it seems, potentially inaccurate. Grant Thornton found that 39% of bosses of firms with revenues from £15m to £1bn interviewed between October and December 2020 said they are going to reduce their office footprint (75% targeting a 10-25% reduction) and reimagine the office to suit flexible working practices. Obviously winter homeschooling hadn’t properly kicked in then, so it’s probably significantly fewer bosses now but, whatever the percentage, it’s a safe bet that an even greater proportion of smaller firms have been thinking the same thing, or a more aggressive version thereof.
So what does this mean for office market stakeholders?
I lease offices for a living and have watched on while they take a battering. It is natural for me to have read the musings of full-time WFH evangelists and pre-backtrack Jes Staley while shouting at my laptop – what I do is the same as dealing in horses while everyone wants a Ford Model T. Offices are ‘ol’ clunky’, the purveyors of them ‘dinos’ and we are all ignoring the new ‘CREality’. Gulp.
Even worse, new-dawn commentators and their tedious catchphrases are right. I say this while writing this blog at 9.30pm, thinking it is 4pm. I say this with bad posture and deteriorating eyesight. I say this despite my earpods having run out of battery five times in one day.
The reason I say this is because the nightmare of full-time WFH will not last forever and the addition of WFA (working from anywhere) and better tech to the working toolbox is genuinely good news for our families and the environment.
Moreover, not only do bosses want to rethink their office footprints, more importantly, their employees – the users of office buildings – have voted: they want a hybrid approach to working. It’s coming from all angles. Damn it – I want a hybrid approach to working! To deny it would be the definition of protectionism.
However, protect I must. I’ve got clients who own lots of buildings that could be less in demand, so what arguments do I have for the ‘snap back’? I’ve got human interaction, growth, supporting CBD businesses, collaboration, learning, inequality of home accommodation, loneliness, poor productivity, water-cooler moments etc etc, all well-trodden, strong counter-arguments. I’ve also got real-life office loyalists, like David Solomon at Goldman Sachs decrying WFH as an ‘aberration’.
Notwithstanding, for each DJ D-Sol there are many large UK businesses committing to hybrid according to the FT, plus plenty of international tech giants like Twitter, Salesforce etc. Each side of the argument can find multiple angles of attack to suit their cause.
End of discussion
But we are all bored of the argument, let’s move on. The results are in. People want hybrid working and their bosses want to drop some space and save cost. That’s why around 6m sq ft of tenant-release space has hit the market in central London. Ouch.
Here’s the surprising bit. This is good news… for those evolving their product.
The straight-line reading of all this is that all demand will reduce and that all owners are up the creek. And let’s be honest, some are.
Some owners are sitting on stock similar to modern diesel Land Rovers. Environmentally poor with, in my experience, terrible customer service and dated features. The only difference is that it’s easy to procure a Land Rover on flexible terms with less than three months of legals.
The prognosis for this type of space is stark. Bold predictions abound of a major fall in rents. Honestly, this is likely to be savage for poor-quality space, despite space-dropping being a slow burn due to fixed lease expiries. Unfurnished, grade B space in tired buildings with bad management and a friction-filled deal process are doomed. What modern business wants that customer experience?
However, there is a flip side. Contrary to protagonist belief, there are clever CRE people who have, for some time, been evolving their products and processes, delivering amenity, flexibility and a partnership approach to their customers, in a sustainable way. They are doing so with more financial stability than all but the best flex operators. Most importantly, on the days you do fancy going to the office, they own pretty much all of the good buildings.
You remember, the ones in great locations in a city you love with nice big spaces to meet your colleagues in; near your clients and other businesses; with dependable Wi-Fi; with terraces and views; near abundant bars, restaurants, shops and theatres. Sounds like paradise!
And so back to the Grant Thornton- and FT-surveyed bosses – very few of them, nor their employees who rightly crave flexibility, want a worse working environment than they have right now. They want an electric Model T, not a horse.
A resounding majority of the occupiers we are engaged with are seeking to deliver something new for their employees. Not always new in the box-fresh sense, but new to them and with a major focus on ESG. After previous shocks, most people assumed the brace position, regeared and refitted. While there instances of this, many more businesses, more than you think from the headlines, are exploring their options to relocate to something better and flexible, be that 75% of their previous footprint or otherwise.
The net result of all this is that the best products delivered by the best partners (office developers and/or flex providers) are still sought after, even during lockdowns, and the worst are starting to die on the vine. The effects of COVID-19 on the market will not be felt uniformly, it will discriminate between the best and the rest. The great offices battle royale has begun!
Now, the comical part of all this is whispered conversations with wide-eyed occupiers. The totally understandable questions from business owners eagerly reading about the opportunity to reduce cost, but quietly prepared to confess that they don’t have a clue how to manage their teams on a hybrid basis. Desk-booking systems, midweek mountain, stag-do timekeeping (Mondays and Fridays off), ‘phygical’ meetings. Less WFA, more WTF.
Strong will survive
That is not an excuse for building owners not to up their game and offer their space as a service, in partnership or otherwise. If they don’t, they will quickly be eclipsed by a post-COVID generation (and some pre) of strong, stable, flex-driven providers/owners who, I believe, will dominate the market going forward.
Business owners will work it out and ultimately deliver the best solutions for their people. Nonetheless, WFH evangelists need to accept that not everyone is as immediately equipped for post-COVID work life and that we are all feeling our way through. The same applies for developers, and advisors, the best of whom are engaging with their customers to build, test and learn, in order to evolve their services.
Ultimately, one thing is for sure, change is coming, it’s the nature of the evolution that is uncertain. Some offices might be repurposed and become urban farms, or maybe some will hear the wake-up call, work harder and continue to adapt and prosper, as they always have done.
Time will tell, but one thing is for sure: home schooling can accelerate off a cliff.