Fri, Jun 5, 2020

Plenty of Life Left in City Offices

This article was first published in Property Week on May 28, 2020.

How fragile yet dynamic the workplace has become over the past four or five decades. Ever since Sir Stuart Lipton and DEGW produced the Orbit Study to underpin the then revolutionary occupational and related investment case for Broadgate, change has been piled on top of change in a never-ending quest to secure the optimal workplace solution.

The driving factors have often pushed in opposing directions. The desire of the chief financial officer to focus on efficiency and cost has not always sat comfortably with the operational desire for a state-of-the art facility that meets the varied expectations of the ever more demanding ‘talent’ modern enterprises depend on.

Now, of course, we have added to this complex set of scenarios the benefit of having endured the most significant, admittedly enforced, experiment in remote working ever undertaken.
What impact could this have on the quantum and quality of CBD office space, rent levels and investment pricing?

The impact of Covid-19 on the workplace has yet to be fully analysed, but the ability to work remotely seems to have become entrenched in corporate cultures. I have been pleasantly surprised by the capabilities and resilience of the Duff & Phelps environment, where colleagues have fluently maintained operations despite working at a distance from each other.

When combined with the saving on commuting time, the productivity advantages enabled by technology are significant and will inevitably lead to an examination of occupational costs – CFOs would like to think that costs can be cut yet further if teams are rotated via shift working to alleviate pressure on transport infrastructure.

The fashionable allure of high-cost serviced offices being used to augment corporate headquarters now seems questionable given the cost-neutral alternative that has been proven to work.
Of course, other pre- and post-Covid-19 trends may offset the rhythm of the moment.

The urbanization of tech, alongside the adoption of new working styles and methods by the financial and professional service sectors, has led to the emergence of a more sociable working environment that is geared towards younger workers.

Social Distancing

It will be interesting to see the extent to which social distancing will distort this way of working, as illustrated by Cushman & Wakefield’s excellent report on Recovery Readiness and the notion of a six-foot office – that being the proposed distance to be maintained between all staff.

There is also a judgement call to be made on the commercial effectiveness of maintaining proximity to the market, clients and competitors.

London, like other major cities, is supply constrained and office vacancy rates stand at around 4%. We can assume that schemes we had anticipated coming forward will now be delayed and difficulties with finance availability and procurement will result in virtually no further starts on site in 2020.

From close to 40 years of experience in this market, I predict that we will see the emergence of a higher but not damaging vacancy rate, say 7%, with a greater impact on the secondhand market. I also forecast that 50% of serviced office stock will return to the mainstream market.

Rents are likely to decline slightly in the short term, but the balance of supply and demand will ensure they do not collapse.

The investment market may slow down temporarily, but the huge availability of investment capital and competitive yields should allow a recovery in 2021.

I have little doubt that the predicted death of the city office, which for different reasons tends to be suggested around every five years or so, will not come to pass.

A perverse outcome of the crisis will be that businesses will become more efficient, but in my view, while working from home will become more acceptable, it is unlikely to become the norm. Demand for offices is unlikely to change, but the way we use them is.

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