By Tom Jansons, Jansons Property
Predicting behaviours in the real estate market is never an easy thing, yet we know that the pandemic has drastically altered this market. Whilst some players have advocated ‘the end is nigh’ for all office space, research shows a different picture emerging – namely the office space as we know it is evolving into something different. The impact of prolonged uncertainty has fuelled change. However, there are other forces at work shaping a brighter and more varied future for office space.
Paying the price of uncertainty
Historically, office real estate has been one of the most attractive asset classes for investors but leasing activity dropped dramatically under the effects of Covid and the forced work from home movement. In the first quarter of 2020, London was in the top 3 destinations for office real estate investment across Europe.
However, stats from Statista show that during the pandemic, take ups fell from 1.34m square feet to less than 0.6m between the first and fourth quarter of 2020. And, after the third lockdown was introduced, the return to the office was once again halted creating prolonged uncertainty around the business climate and in turn the demand for office space.
An increasing number of tenants deferred office moves and lease extensions and started looking for short-term, flexible accommodation until economic conditions became more certain. This shift has therefore seen the flexible and serviced office market expand rapidly, underpinning the growing demand for a broader office market.
As we move through 2021 and the easing of lockdown restrictions, many businesses were able to return to the office. This resulted in a slow but sure uptick in the demand for offices, as space under offer in the London market rose by over 50% across Q2 to 2.3m square feet- which was the highest it had been since Q1 2020.
This momentum is predicted to continue throughout the second half of 2021. This can be seen in the latest Deloitte CFO Survey, which showed 95% of their UK CFOs are expecting their workforce to return to the office this year and nearly half believing Q3 of 2021 to be a key quarter for staff returns.
It is unclear though that the office real estate market will ever return to what it was before the pandemic. Not only must we consider the fact that distressed asset sales may not appear on the radar simultaneously with the start of a recession, so we may be yet to see the impact of Covid-19 in its entirety; but also that the office space market will depend heavily on the working standard that arises from 2021.
Planning for change
Also, with the change in Government planning policies and the loss of Permitted Development rights for assets over 1,500 square foot underpinning asset purchases, many buildings are remaining office buildings even though they would now be better suited to a conversion given that environmental, social and governance (ESG) issues have now become a priority for investors and more purpose focussed/ niche buildings are required for office space. Large, sole-occupancy office buildings are becoming more outdated and in turn, less attractive to investors
Big city exodus
Simply studying the increase and/or decline of uptakes does not paint the full picture though. A further significant change we are seeing in the office market post-pandemic is the move away from major cities. The suburbs are becoming cool again- boasting better air quality, more space and less commuting. Along with this, it is also far more cost effective for occupiers to move out of the city with London prices set at around £80 per square foot, compared to maximum rents of £40 per square foot for Grade A buildings across the South East.
Desire for healthier and sustainable workplaces
Whilst there will always be a need for well positioned office buildings in London, the pandemic has brought ESG, mental health and healthy work life balances into the spotlight. The bottom line is offices now need to be a more attractive space to work in than from home. Along with this, the net zero carbon targets are driving the introduction of sustainability concentrated solutions, which have the added benefit of reducing energy expenses too.
The ‘R Plus’ office building in Reading, for example, has reduced expenses by up to 30% by using energy-efficient luminaries and roof mounted solar panels according to the Morgan Stanley Institute for Sustainable Investing.
In fact, the South East is already seeing significant investor interest in out-of-town business parks and modernised office spaces designed to boost creativity and collaboration and reduce stress. We can therefore predict that this rise in office requirements will filter through to even higher take up figures outside of London for the third and fourth quarters of 2021.
Workspace of the future
Covid has re-shaped ideas about the workplace, as employees reaped the benefits of working from home. Now, businesses need to make their office spaces more attractive, comfortable, accommodating, and enjoyable. It’s about hitting the sweet spot between improving employee wellbeing without neglecting productivity, which in many modern office spaces includes size, layout and location considerations; placing an emphasis on flexible or hybrid working; introducing collaboration space for constant communication needs.
This ‘hotelification’ of office space is predicted to continue to sustain and nourish corporate communities and provide environments with a human element. But with these changes, a cultural shift in the traditional office needs to follow. A modern workplace will go far in attracting new talent, but it also needs to cultivate an honest and productive working culture to build efficiency and work effectiveness.
Different personality types are suited to different working environments, for example, and the challenge developers and designers are now having is catering to these various working styles in the same space.
There has been a clear shift in the way office spaces are presented- with a focus now on selling workspaces as opposed to offices. The pandemic has not caused the extinction of the office, rather the evolution of it. It’s time to watch this space.