Nick Terry considers whether lockdown implications may reduce commercial tenants' appetite for office space, drawing on discussion from our recent webinar with Mayer Brown on the outlook of UK and European real estate financing.
Occupiers of commercial real estate have had to adjust to working remotely since lockdown measures were introduced across much of Europe in mid-March. The 'new normal' has changed our perceptions of the physical office space as workforces have transitioned to working from home with relative ease. But will this extraordinary period influence decision making when it comes to considering future requirements for corporate office space?
Portfolio reviews are inevitable
Office tenants will undoubtedly have to review their portfolios in terms of size, location and how flexible their occupational contract is. How much space they need in the short-term will depend on how they intend to safely transition staff back to the office in line with government guidance and whether they actually need all of their furloughed staff to return to work.
Given the long-term nature of many commercial real estate contracts, it is difficult to see there being a flurry of knee-jerk reactions from major occupiers in response to the crisis - with the exception of occupiers of flexible office solutions, of course. New enquiries for office space will probably be stunted in the short-term. That being said, between June 2020 and December 2021 there are approximately 1,500 tenants in over 10 million sq. ft of office space across central London with leases due to expire. This will provide those occupiers with a window to reassess their footprints and requirements.
A remote future for employees?
Remote working has now been proven to work for the large majority of office workers and I wouldn't be surprised to see a rise in the amount of people working two or even three days a week from home as a result. Yet, given social distancing measures, it is unclear whether this will mean businesses will require more or less space. In the UK for example, employers have a legal responsibility to protect workers from health risks and will need to carry out Covid-19 risk assessments in consultation with their workers or trade unions. Workspaces may have to be re-designed to maintain two metre distances between people whilst creating one-way walk-throughs and ending hot desking are but a few of the changes employers will be expected to make. Inevitably, these measures will have an impact on the amount of space a commercial occupier may need. At this stage, it is difficult to know whether measures will be a permanent requirement and so tenants must exercise caution and stay abreast of government guidance.
The office is here to stay
Remote working certainly has its benefits but I think this period at home has reminded us of the convenience and utility of being in the office. Whether it's accessing the industrial printer and scanner or asking a quick question to a colleague in another department, being physically present in the office has numerous benefits. There is also the human factor to consider. We are social beings by nature and it is often difficult to pick up on social cues via video chat, whilst having a quick conversation with a colleague or going for a drink after work is an enjoyable aspect to office life.
Undoubtedly, there will be a post-Covid need for offices and having a good office in a popular location will remain important to a significant number of businesses in attracting and retaining staff. From the investment perspective, the core central business district (CBD) office markets will continue to be seen as attractive, liquid investments (in property terms). A cornerstone of real estate investment, the office sector is here to stay and that is unlikely to change. As ever, it will be those fringe locations outside of the CBD which will be affected.
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Originally published 20 May 2020
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