We will soon be “celebrating” the first anniversary of the “Great British working from home experiment”. Millions of people have swapped their daily commute for working from their spare rooms, kitchens and home offices. Zoom and Teams calls have replaced face to face meetings; casual attire has replaced the formality of office dress and flexible working has become the new normal.
The government’s vaccination programme is creating some “light at the end of the tunnel” and many employers and workers have begun asking what the future of offices and working will be. Is there a desire, or a requirement, for an immediate return to a pre-COVID-19 office environment? Will the many benefits and efficiencies of home-working identified during these past 12 months be lost as we return to more normal working patterns?
This could spell the end for offices or we may be heralding in a new style office, fit for a post-COVID-19 world. Investors, developers and all stakeholders will be affected by the changing expectations. We look at what this means for the sector. Will there be feast or famine in the London office market?
A two-tiered market?
A number of industry specialists and sector commentators have begun expressing a view that high quality, well located buildings with excellent environmental credentials, pleasant user experiences, wellness capabilities and great use of technology can be expected to become the subject of increasing demand.
There are two obvious reasons for this;
- the demand from “Enlightened Corporates” to provide quality space for their workforces and clients to collaborate and network; and
- ongoing recessionary pressures will ensure that, in the short to medium term, the supply of newly constructed, high quality and well located office buildings will be restricted.
These two drivers can be expected to push up rents and capital values for the “right office solution” at the expense of less well located buildings with insufficient collaboration space. This has the potential to create a two tiered market.
Of course, not all of the existing office stock will be right for conversion to high quality, HQ-style buildings that support staff collaboration and networking. Logic would suggest that occupational demand for what might previously have been considered reasonable quality offices, but that cannot now be upgraded, is likely to suffer. The financial implications for those left “holding the parcel” will, almost inevitably, be lower achievable rents and, as a consequence, a reduction in capital and investment values. Lenders and investors should be wary.
Permitted Development; A helpful lifeline for under-pressure property owners and developers
There is a “get out of jail free card” that developers might hope or need to deploy as it becomes apparent that the investment values for such older style traditional office buildings are under pressure and that is the potential for repurposing, particularly for residential use.
The ability to convert office accommodation to residential use without planning permission under Permitted Development (PD) Rights has been around since 2015. However, many London Boroughs have been exempted from allowing PD and in many parts of central London full planning permission will still be required in the usual way. As a consequence, whilst PD may provide a helpful lifeline for some under-pressure property owners and developers, and some comfort for existing lenders, this may not be a realistic alternative for many other stakeholders in the London office market.
Areas of the market most impacted
So far as concerns secondary and tertiary London offices, it is this area of the market that almost certainly will be under the greatest threat from changes to demand post COVID-19. These buildings are often located on the outskirts of the more established business districts and have little opportunity to repurpose, either for collaborative space and/or for residential use. They represent up to 50% of the London office market. Interestingly, there are offices like these in most UK cities and the actions recommended here will also be relevant outside London to some degree.
Property owners and lenders alike will need to be receptive to changes to the business community’s office needs and wants and should be sufficiently “fleet of foot”. We would advise all stakeholders to take another look at their office portfolios. The aim must be to understand which offices are, or could become, the desirable, high-quality offices of the future and, to formulate a plan for dealing with those other office buildings that might be left behind.
Businesses that have a clear view and understanding of their office dynamics and how they will be affected by the changes that are undoubtedly coming, will be more likely to secure successful outcomes in what is expected to be an active, and possibly volatile post-COVID-19 London office market.
Want to be ready for the changes in the office market? Get in touch.