Shifting working patterns: What is the reality for offices?

Over the next three weeks, EG’s head of workplace and offices research, Graham Shone, takes a deep dive into how the coronavirus pandemic will change national working patterns and the knock-on impact of those changes on not just the office market but the wider real estate ecosystem. Drawing on data from EG’s Radius Data Exchange and other sources, many of the discussion points reflect changes that are likely to take place as a result of this uniquely accelerative event. The office sector is likely to be the area of commercial real estate which is most affected by both the immediate and longer-lasting shockwaves caused by the Covid-19 pandemic. While it has exacerbated long-standing structural issues in the retail sector, and caused some concerns around the future of hospitality and leisure, the very nature of office-based work is being unilaterally questioned. What this means for the office market is that an acceleration of consolidatory moves by companies (planned and unplanned) is likely to take place – especially off the back of a severe economic shock. Operational costs will be reviewed during the recession and immediate recovery period. Even if office space is not a huge drag on the bottom line, present and future circumstances leave it susceptible to be slimmed down off the back of better enabled remote working. This does not, however, mean the “death of the office”. A consolidated core office space supplemented by increased provision for home-working and flexible additional occupation spread across different geographies should be the triumvirate approach to workplace location taken by the majority of office-centric companies moving forward. Allied to these three pillars, employees ought to be given as much licence as possible to determine for themselves where they feel most productive, and the segmentation of locations for that productivity should be malleable over time as life circumstances change. Therefore the necessity for some slack to be built into companies’ physical space provision will be of critical importance to ensuring that businesses can adequately supply the spaces required for their workforce to optimise their output. That slack may take the form of “overspill space” in their core offering – which initially may be seldom occupied in its entirety as remote working retains novelty value – or a rolling flexible arrangement in decentralised locations closer to employees’ homes. The critical long-term aspect within this to consider is that as the initial shock factor of this pandemic begins to subside, companies may need to legislate for the possibility of more people wishing to come into the office more regularly than they had planned for. This multi-faceted approach will better enable companies to maximise their productivity and enhance their ability to retain and attract talent. The much-publicised missive from Twitter on its approach to this issue included language which was instructive as to what we might expect going forward. Back in May it said: “The past few months have proven we can make [remote working] work. So if our employees are in a role and situation that enables them to work from home and they want to continue to do so forever, we will make that happen.” This was – pointedly – not a mandated instruction to their workforce but a signal of giving their workers the agency to decide what working pattern best suits them in perpetuity. Shaken to the core? Major town and city centre markets with high office density are likely to be most acutely impacted in the short-to-medium term by the shifts in working patterns. Those prominent markets house the most expensive business space across the country and represent the biggest “bang for buck” saving for companies considering large-scale consolidation. They also account for a large proportion of office leasing activity and stock relative to their respective land area meaning any movement in the quantum or regularity of office space requirements will have an outsized impact. Figures from Radius Data Exchange reveal the extent to which those 13 major markets dominate national leasing activity, with 49.8% of all square footage let from 2015 to 2019 across Great Britain being in the 12 major regional office markets and core central London. There are myriad reasons for city-centre appeal to both developers and occupiers, but infrastructure and proximity have always played an important role in underpinning the attractiveness of these areas. Modern requirements have, of course, evolved beyond these fundamental tenets, with sustainability and digital connectivity now also attracting rental premiums. Environmental factors and digital connectivity are unlikely to decrease in importance over the foreseeable future, so those markets with good levels of high-grade core provision – or a healthy pipeline of new-build space – will be better insulated from the worst impacts of the immediate shifts in working patterns. The overall quantum of core provision required per company will be reduced in comparison to similar transactions struck pre-Covid.  However, this is not necessarily a phenomenon that is alien to those operating in key office leasing markets. Take London as an example. The behaviour of most companies acquiring new space in the capital is to vacate more space than they take in new letting deals. According to Radius Data Exchange figures, this net consolidation of office provision since March 2016 has not meant that the London office market has stalled or suffered with swathes of vacant space returned to the market. Before the virus struck, London was approaching a record volume of new office space under construction with a healthy pipeline of space coming through underpinned by strong preletting levels and robust rental performance. Similarly, in other key UK cities, new-build provision has helped to maintain upward pressure on headline rental tone as wider consolidations were taking place. The appetite from companies for that quality core space will remain relatively abundant but on a reduced footprint-per-company scale that might accelerate the repurposing of redundant stock and necessitate some rental corrections. Analysis of office hereditaments plotted against gross value added by local authority, shows that the areas with a highly concentrated volume of office stock are by far the biggest net contributors to GDP. The top decile for quantum of office stock by local authorities contributed almost 35% of GVA in 2018, whereas the lowest decile for office space accounted for just 2.5% – underlining the critical role that office-based businesses have in supporting the economy and how important their enterprise will be in bolstering the national recovery. It could be that this level of productivity is “shared” between the core office location and the supplementary working hubs; or it may be boosted if employee-driven demands for flexible working to enhance productivity come to fruition. If either of those scenarios occur there will be wider gains for the country to be distributed more evenly in a geographical sense.  It may even lead to further real estate opportunities in retail, leisure or residential sectors across those new geographies. The enduring appeal of offices Beyond the purpose of providing a place where everyone in an organisation can work together there is, of course, a socially ritualistic element underpinning the growth of the office as the nation’s workplace. Over the last few months there has been a great deal of consideration from workers as to how their current situation might change once we begin to craft the “new normal” and how best to segment the working week between home-working and the office. Commuting is often an unwelcome burden in terms of cost and convenience, particularly to and from those busier built-up city centres that house the majority of the country’s productivity. It does, however, allow workers a physical and temporal separation between home and professional life. The power of distance between where we work and where we recreate or enjoy family life should not be underestimated. Collaboration and cohesion of working teams is easier done in person, no matter what the technological advancements allow us to do on an individual basis at home. For many businesses, the toughest thing to quantify in the post-pandemic “new normal” is the value placed on qualitative things such as spontaneous interactions and learning through osmosis against the sheer data-driven calculation of looking at a balance sheet and understanding how much could be saved by eschewing office space altogether. Much will depend on employee feedback about what exactly they want to do as they adapt their working patterns and how office-based companies think their flexibility on working arrangements will help or hinder their ability to attract and retain talent. For those newly entering the workforce as graduates it might mean a natural shrinking of social circles and that the collegiate atmosphere is suppressed as a result of splits in team occupation of office space. This might lead to enhanced relationships with neighbours or family instead and reduce the necessity for people to move away from home towns or villages to find employment. If workers do not feel they will be able to naturally form new friendships and relationships through their place of work in a post-Covid world, it may also reduce the movement of people between town and cities. All of these sociological aspects will be important to consider. The nature of how people interact with their environment underpins much of what the commercial real estate world is built on and as that environment becomes naturally altered owing to decisions around the workplace, the industry will need to understand more fully what the challenges are in providing appropriate infrastructure for a post-Covid working world. Read parts two and three of EG’s Shifting Working Patterns report: Shifting working patterns: How WFH could be the high street’s saviour Shifting working patterns: The expanding commuter belt To give feedback and comment, e-mail graham.shone@egi.co.uk or tweet @estatesgazette using #shiftingworkingpatterns Photo: Shutterstock