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Will city centres and offices revive?

The government is trying to encourage workers back to their offices to boost the economies in city centres. But as people have got used to working from home, is this realistic?

The government is trying to encourage workers to back to their offices to boost the economies in city centres. But as people have got used to working from home, is this realistic?

Charles Stanley

in Let's talk about markets


The office property market has declined a bit as a result of the interruption to demand from tenants and the sharp fall in investment interest. In London, there is a reluctance by landlords to cut rents, but the considerably reduced volume of new leases often entails a much more substantial rent-free period than before the pandemic. This may amount to something like a 15% or more discount on previous levels.

The limited amount of new space coming onto the market is more likely to let, as it was often arranged in advance with a pre-let or understanding to give the developer encouragement to take the risk of building. The amount of available space has risen from 14 million square feet to above 17 million square feet and will continue upwards if tenant demand remains this depressed.

Worldwide reports are worse from Hong Kong where high prices and political worries exacerbate the situation, and from cities like Lisbon and from Mumbai where oversupply compounds the virus setback. New York and Los Angeles are also experiencing oversupply and weaker markets. Most centres face the same reality.

Many global companies are thinking about how much central city office space they want in the future, and many are delaying commitment to new and bigger space whilst they see how recovery pans out. The market in the properties themselves lags behind the stock market evaluation of property investment companies. Share market participants have voted with their portfolios for a substantial fall in rents and capital values based on reduced demand for traditional offices.

Some positives

It is not all gloom in commercial property. Food stores have picked up business from the collapse of eating out, and their sites are well bid. The never-ending long march of the tech giants and their smaller challengers creates demand for their special space, for distribution centres and warehouses for online retail, and mixed office and industrial floorspace for their own activities. There is scope to convert more commercial property into residential, and demand for upgraded and new properties that meet higher specifications to hit green targets and to match raised employee expectations of the working environment.

Today the centres of many great cities are strangely quiet. Office workers are reluctant to get back on the trains and mass transit systems to come into work when many can succeed from home. In an age of social distancing in many countries, it would be against government guidance and in some cases against the law for employers to expect staff to get on crowded trains or to work in densely packed offices using cramped common areas and meeting rooms.

Recent surveys in the UK show a marked reluctance by many to want to get back to five days a week city office working. Younger and single staff members are more likely to want to return to the office for the company, especially where they are living in small city-based expensive accommodation and want a change of scene.

Those living in larger properties outside the city centre, with family commitments are more likely to value the idea of working at home for at least part of the week. Being at home allows them to take in the Amazon parcels, supervise the plumber and be on hand for the children whilst attending to their work duties through online video links to their office in the cloud. The dedicated probably end up working longer hours, letting work run into what was before travel or home time. Those who gamed the office can game homeworking even more easily.

What lies in store?

Opinion is divided about what this means for future office demand. Some think this is the lull before the storm. Why would so many large companies want to go on paying landlords for vast expensive offices which they do not plan to use for anything like the same number of people as before? Won't they start to think about more, smaller local offices, and different types of space for events and team meetings, rather than desks for everyone to work in the same office centre five days a week?

Will they actively promote more homeworking as a way of getting talent and cutting central costs? Maybe many will wait for their lease to expire, as they are not, on the whole, driven by the same dire necessities as the retail sector whose revenues have collapsed when trading from the more expensive central properties. The retailers either need a dramatic increase in footfall soon or much lower rents and less space. As a result, they are forcing conversations for rent cuts by threatening walking away from leases through bankruptcy.

Others think two trends will come to save the office market from big collapses. They reckon as the virus recedes or as treatments and vaccines are available to dull its impact, so more employers and staff will want to get back to work in an office context. It will be helped when all children are back at school full time. Perhaps the current elongated period of homeworking is a one-off and we will wake up one day to find the trains crowded again. Many offices got used to being the delivery point for online shopping, and employers showed flexibility for people with family commitments. Maybe companies can do their bit to bridge the gap from home to office.

There will also for the time being be a demand for more space per employee. A return before the virus is controlled means bigger spaces for each desk, and for the meeting rooms and social areas. it may also mean expensive adaptation of heating and ventilation systems, improved cleaning regimes and more care and attention to washroom facilities. These developments give the property industry some heart that there will be value-added opportunities to keep more in the city centres.

A lot is riding on these decisions and moods. The city centre has a network of bars, fast food outlets, restaurants, laundries and dry cleaners, shoe repairers, clothing shops, office suppliers, shops for presents for family members and the rest, the things that a better paid office workforce relies on before the dash home. It looks as if it is going to be slow progress. It is not just fear of the virus that is bringing about a rethink to the five-day-a-week commuting model. As we wait for resolution there is likely to be more damage to rents and property values, and more permanent reduction in service business capacity as the cities remain strangely silent.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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