post pandemic office

Newmanor Law webinar: The Office Post Pandemic

Newmanor Law webinar: The Office Post Pandemic

At the end of March, we began a series of Newmanor Law webinars, with the aim of offering valuable insight into current and relevant issues impacting the commercial real estate sector.

For each webinar we are inviting experts in relevant fields to provide our audience with the benefit of their experience of the issues under discussion. For the second in this series of webinars, we looked at what changes we can expect in the office market post pandemic as organisations accept hybrid working to a greater or lesser degree. Joining Newmanor Law hosts, Karen Mason, co-founder and real estate partner and Alex Pelopidas, finance partner, was a distinguished panel, consisting of:

Tim Richards – Director of Agency at independent chartered surveyors, Aston Rose

Lettice Swan – Associate Director at project management specialist, MDA Consulting

Tim Schuy – Founder and MD at finance sourcing experts, Five Fields Finance

 

Is the office dead?

Our webinar began with a quick poll of our audience to see what they think the market currently looks like in answer to the question,what do you believe the occupancy rate of offices to be nationally?’.

The results of the poll were fascinating, with 53% of our audience believing occupancy of offices currently stands at 25 to 50%. 35% of our audience believed occupancy was at 50 to 75%, with only 12% of our audience voting for occupancy of less than 25%.

Responding to the results of the poll, Tim Richards explained that the most recent figures from specialist real estate management consultancy Remit Consulting showed that, across the whole of the UK, office occupancy is at just 28%.

Interestingly, given the current acceptance of hybrid working by many organisations, office occupancy actually changes by day – a first for the sector. Unsurprisingly perhaps, Tuesday, Wednesday and Thursday are the busiest days of the week, with Monday slightly less popular. On Friday occupancy is just 17.5% across the country, all of which meaning the average desk is only being used for just over a day each week.

What’s the impact of hybrid working?

A recent CBRE survey canvassed businesses on how likely they were to offer hybrid working to their employees. The figure has been creeping up with each survey conducted and currently stands at 75% of those quizzed saying that they will offer hybrid working to their people.

Lettice Swan offered an insight of the picture nationally, citing cities such as Leicester and Manchester which appear to have been much slower in adopting hybrid working practices. This suggests that this shift to hybrid working is perhaps more London-centric than nationally.

Tim Schuy offered the investor view, explaining what investors are thinking and what they are currently doing, starting with reports of central London investment volumes in the first quarter of 2022 standing at a record high of £5.5 billion. This would suggest that there is still confidence in the London office sector.

However, with all this uncertainty the lending market on the other hand is taking a cautious approach to offices. Our panel felt that banks would be retrenching and focusing on existing clients.

So what does all this mean for the London office investment market?

The answer offered by Tim Schuy was that when interest rates go up, asset values have to fall. And what will happen next really will depend on the view that investors are taking on the London office market as a whole. If investors believe that interest rates are staying up for the foreseeable future, sellers will need to accept that their offices will be worth less than they were at the beginning of the year, which will inevitably lead to a price correction in the market and that will be reflected in higher yields.

Considering the impact of interest rates, we asked the audience how high they believed interest rates would rise this year. The majority thought rates would peak at 2.5%. Only 12% of our audience thought rates might go higher and 29% thought they will stay at 2%.

Our experts believed this may only be the beginning of the change too, arguing it takes most businesses, particularly larger ones, considerable time to change policy and address these issues. With the average rent for lease being five years, organisations have time to think through their options.

What are occupiers looking for currently?

The discussion then turned to what office occupiers are now looking for given the changes in work practices. Quality space appears to be at a premium, as is energy efficient space. Shorter leases, which will undoubtedly provide more flexibility are on the rise, and ultimately, with hybrid and flexible working increasing, there are more organisations seeking less or reduced office space.

This is evidenced by the office vacancy rate in London which has doubled since the start of the pandemic, going from around 4% to 8.2%. Some markets, such as the City, Midtown and Docklands are showing a vacancy rate of more than 10%.

The general consensus was that the market is likely to see a drive towards increased quality as the required office space reduces. The better office spaces will feature gyms, showers, changing areas, outdoor terraces, nearby outdoor green spaces and good transport links, whilst being smaller too. Quality space will be required to help entice workers away from the convenience of their home, back into the traditional office.

In addition to the quality of the office space, our panellists also discussed the idea that there is really no replacement for face-to-face connection. Despite advances in virtual meeting technology, these platforms are limited in their ability to maintain the collaboration necessary for many organisations.

Will energy efficiency become increasingly important in office choice?

The sustainability conversation has been coming to the forefront more and more in recent years, with better energy efficiency ratings moving from ‘nice-to-have’, to a more critical consideration. Certainly, in the top range of the market, some funders are making it a requirement to have sufficient energy rating in place before they will lend.

It’s something borrowers will have to provide going forward and owners will expect more data on the energy efficiency of their investments. This will inevitably trickle down from the top of the market to the middle market and individually to the mass market, with buildings that have poor energy ratings, much harder to trade.

When we asked our audience how important energy efficiency is to an occupier, 44% said it was important and 33% said very important, with only 22% believing it’s less important.

Will the office market be affected by alternative uses?

As the demand for office space weakens, will buildings be repurposed?  Office-to-residential is already a well-established route. More recently we have seen office blocks converted into hotels and student accommodation to take advantage of good locations.

We are also seeing more mixed-use buildings, with new hotels combining commercial and retail space with serviced apartments. Even care home operators are seeking to take advantage of the opportunities to build in more convenient locations, rather than remote rural sites.

Our expert panel offered a note of caution, however. Normally when an office building gets repurposed to something else, you don’t see the same capital values that you saw before, it is usually a question of trying to recover some of the previous value rather than trying to maintain it.

What will encourage occupiers to return to the City of London?

Flexibility of leases was the top response to the question about attracting occupiers back into the City of London, with cheaper transportation being the second most popular suggestion. This shows that part of the challenge in terms of getting people back into the City does relate to transportation costs.

The challenge for building owners will be to offer flexible leases that satisfy occupiers, whilst delivering the returns they need, against the backdrop of a requirement for less space to accommodate a hybrid work force attending the office for fewer days a week.

Our last poll asked the audience how many days a week they expected to work from the office in future. Unsurprisingly perhaps, three to four days attracted 47% of the vote with one to two days at a notable 37%.

The full five days in the office attracted only 11%, with the remaining 5% of the audience believing a fully remote approach was the future. The challenge for the office market is that very few people see the future as five days in the office. However, our panel confirmed that the sector is very adaptable, and investors are still very keen to invest in offices. This ensures that they will undoubtedly deliver the lease flexibility and quality space occupiers are searching for.

Please watch the recording of the webinar, it is a worthwhile 50 minutes and we hope these highlights will encourage you to join us for our next webinar.