There is still demand for office space but what we want has changed

News of the death of the office has been greatly exaggerated. Within weeks of the first lockdown in March 2020, there was a rush to read the last rites to the traditional office. Our city centre commercial districts were going to be the ghost estates of the 2020s as the new era of home and remote working obviated the need for dreary commutes to drearier offices.

As often, however, the reality turned out to be very different to the prediction. The office market didn’t collapse: lots of people still want to work in offices, and demand remains strong for new properties.

“We have seen an impact,” says Marie Hunt, executive director of research at CBRE. “At the beginning, we saw a few companies saying they had spare capacity and looking to sublet it. The vacancy rate did go up as a result. This is known as grey space – fully fitted out but surplus to requirements.

“Companies are now taking that back as they move to a hybrid or blended environment. Having employees working full-time at home is not good for the people or the business.”

There wasn’t much evidence of downsizing according to Brian O’Callaghan, a partner at law firm William Fry. “To the extent that an office tenant had a break clause, the right to terminate the lease at a fixed point during the lease, some tenants have leveraged that to secure better terms.

“Where leases were close to expiring, tenants have also used that to try to negotiate more favourable rent terms on the basis of committing to a new lease but, by and large, there has not been a major trend towards downsizing.”

Hunt notes the US trend towards a hub-and-spoke model with the main office being in the city centres and hub offices in the suburbs and further out. “It could well be the case that some organisations here will adopt that, but I don’t know if our cities are big enough for that.”

The configuration of buildings will definitely change, she believes. “Modern buildings will have much more collaborative space and not so many rows of desks. There will be much more hot-desking as well. Our office in London has been completely revamped.

‘Collaborative space’

“It’s all about collaborative space and areas for town-hall meetings and so on. Before the pandemic people were talking about the need to have gyms and concierge facilities. Now they are asking about windows that are able to open and access to balconies and so on.”

The net effect is that the shift to remote and hybrid working has not had any material impact on the office property market, says O’Callaghan.

“The amount of space being sought by occupiers has not changed in any material way but what companies are looking for has changed,” he says, echoing Hunt’s point. “There has been a shift in how occupiers view the office and there is an expectation they won’t have all staff in the office all the time.

“Office space is now being repurposed and refitted so that there is much more collaboration and customer-facing space. Rather than having distinct and separate teams occupying the office at any one time, occupiers are looking for the capacity to have the option to have all of the office in the building at the one time, whether for social or business reasons. There is a renewed focus on amenities and what the office can offer to staff to encourage them to undertake their commute to work.”

The nature of the work being carried out will likely dictate the design of offices in future. “Most traditional office-based workplaces will no longer require their teams to be 100 per cent office-based, with the majority of employees seeking to work from home at least two or three days a week,” says Andrew McCracken of real-estate services firm JLL.

“What we are seeing is more extensive use of hot desking across most sectors and employers will need to gear the freed-up floor space to allow for more focus rooms and smaller meeting rooms to allow confidential and complex work tasks to be carried out. Overall, the likelihood is a similar space requirement for most companies but with a major change in workplace design strategy.”

Those positive views don’t mean the market didn’t suffer though. “The volume of leasing did fall sharply at the beginning,” Hunt points out. “Companies were focusing on their core businesses and not thinking about their office property needs. Demand is now back almost to pre-pandemic levels.”

‘Market boost’

And there are some lingering effects. “It is taking a long time from when organisations say they are looking for space to when they move in,” Hunt observes. “But that should see a good carryover of activity into 2022 and that will boost the market.”

Those pieces of turbulence apart, yields have remained remarkably steady. “The yield stayed exactly the same at 4 per cent, there was no shift at all,” she adds. “There is still a lot of confidence in the office market and the likelihood is that the yield will get keener.

“One thing that was not in the market before this is the availability of more flexible spaces like WeWork. You don’t have to make a 20-year commitment if you need extra space for periods.”

Rents have also held up, according to O’Callaghan. “There doesn’t appear to have been any major impact on the rent levels being achieved for prime office space,” he says. “It does, however, seem that better located buildings and buildings with better amenities will achieve higher rental in the market than buildings that are not serviced with amenities that will entice and encourage staff to come back to the office.”