What to expect from commercial rent contracts after COVID-19
The future is flexible when it comes to office work. It’s clear the crisis has accelerated remote working and that a large proportion of us are both happy and productive with our working from home set ups.
We’ve had a look at some of the actionable short-term measures worth considering to help minimise and contain the risk of potential infection when your team returns to the office in here. But what long-term effects can we expect to see in commercial office renting? Is this as an opportunity to rethink and rebuild the most functional and productive workspace?
There’s a huge degree of uncertainty surrounding rental contracts and the kinds of office space businesses need. It seems likely that it’ll be skewed towards lower demand in the next few years while right now we need considerably more space to maintain social distancing at work.
In a recent survey, Gartner found that 74% of CFOs intended to move ‘at least 5% of their previously on-site workforce to permanently remote positions’. As we saw in our previous office article, two-thirds of people say they expect to work flexibly 20-40% of the time. While working from home was beginning to be taken more seriously pre-COVID, its limitations have been undermined by the ways we’ve successfully adapted to remote work these past few months.
The end of the office has been declared over and again but it seems this time that it truly will be the end of the office as we know it. Commercial rents force businesses into long contracts that are subject to steep increases after staying flat for a period of time. Crucially, these increases aren’t linked to inflation but have more to do with what they can charge new clients, and in turn ask you to match.
Following the financial crash 2008, many property developers bought up a lot of central London real estate, and it’s likely that those with adequate cash reserves and leveragability will do the same now. It’s been reported by Deloitte Real Estate that over 15m square feet of office space is under construction right now in central London, but how much of this will ever be used as intended?
Great Portland Estates, which owns £2.5bn of London property, isn’t planning on slowing down their planned developments. They’ve even just signed Exane BNP Paribas as a tenant on a 15-year lease. Developers, at least, don’t seem to be taking the trend too seriously.
In fact, real estate research firm Green Street Advisors is expecting vacancy rates in central London to be lower than after the financial crisis, falling from 4% right now to 7% in 2022. But the question remains on how these spaces will be used. After the crash, many were converted to residential properties, but it’s hard to see many buyers being attracted by central London as work (and the commute) becomes a less limiting factor.
5 years ago, the government introduced legislation that required all buildings to pay business rates, whether they were occupied or not. This is a significant cost on landlords, many of whom expanded rapidly using debt and are now struggling to sustain their outgoings. This may offer hope for a complete revolution of the way we price rent as landlords clamour to at least get tenants into their empty properties when previously they would be happy to wait for a higher payer to come along.
The pandemic has certainly changed our split of time between home and the office. Our working lives will undoubtedly enjoy greater flexibility and more nuance. Over the years we’ve seen many companies, especially in tech, become more like the home anyway. Take the Google campuses and relaxation in dress codes across most industries.
We’ll be dealing with short-term, post-pandemic effects for a while. The next year will undoubtedly be challenging, but after this there’s huge potential to completely rethink and reassess our use of office space.
You may be thinking only about appropriate sanitisation and containment measures while the threat of COVID-19 is around and a second wave hasn’t been ruled out. Offices need better ventilation and more open space to accommodate social distancing at least in the short-term. But with many employees coming in just a handful of times a week and remote working sticking around, in the long-term, we’ll need far less space.
Offices in central London have proven largely unnecessary to the day-to-day work of most teams. Larger organisations will move to smaller, branch offices and remote teams in private offices. Investment bank Jefferies has estimated a decline in city office space rates from £75 to £65 per sq ft.
71.5% of startups surveyed by Coworking Insights that use coworking spaces across the globe say they’ll return to these spaces once lockdown ends. They’ve also looked at recent space requests and have seen a significant shift towards private offices and higher capacity. This makes sense as a social distancing is still very much required.
The office is great for bumping into colleagues or acquaintances spontaneously. These connections are hard to maintain and sustain digitally but flexible working may help with these encounters. While it can be distracting working in an open plan office, coming in less frequently and working in a more flexible set up that can be moved around from day-to-day can encourage and facilitate creativity.
Landlords and developers will need to focus on the kinds of spaces people will be looking for that offer something more than simply rows of desks. We’ve already established that we can take meetings from home and check our emails anywhere. The office will need to be a more nuanced and specialised space than it is now. Traditional or design-led spaces will become less relevant as efficiency and purpose become far more important.
Coworking spaces (which make up 5.5% of London’s offices, accounting for 15.1 million square feet) may seem hardest hit right now, but it’s too soon to write them off entirely. We’ve already seen a move away from hotdesking, and short, rolling leases make up just 7% of current coworking arrangements. Individual offices account for around 80% of space in WeWork buildings, and enterprise clients count for 40% of all memberships.
As large, central offices seem less useful for a workforce that spends more time working remotely, the use of private offices within coworking spaces may become more and more common. Occupiers will want more flexible options as fewer people need to be in an office 5 days a week.
The focus until now has been more on the building or space being leased rather than the businesses paying for them, especially in landlords and developers’ eyes. Are we heading towards a closer relationship with landlords and rates based on turnover or profit as we’ve seen suggested for the retail sector?
Across the board it’s likely that rent will be linked to inflation rather than the whims of landlords. Paying monthly may also begin to make more sense than quarterly as working becomes more flexible in every capacity. The days of long leases could be over.
Decentralisation seems a likely outcome for many offices as employees can afford to spend more time away from the office in their homes. We’ll require more space in the short-term but there will also be fewer people in for the full working week. This second outcome seems likely to take hold for a long time to come. The necessity for greater workspace may drive offices further out of city centres, regardless of rent falls. People will look to less highly populated areas and their offices may follow.
While in the long-term there’s likely to be a decline in rental value, this will only become apparent slowly as companies wait out their current lease contracts which can be decades long. With so many people indicating that they’ll be working from home a lot more in the future, there simply won’t be as high a demand for space – particularly not in very central areas. It’s an opportunity to cut costs in an unknown post-COVID world as well as a natural progression that was beginning to take shape even before lockdown was announced.
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