The office sector must learn from the pain endured by retail

COMMENT Arriving at P-Three’s central London office this week, I noticed how much busier the West End is right now compared with just a few months ago. It occurred to me that thanks to the combined effect of multiple factors – including Brexit, climate change and Covid – the once apparently impregnable central London office market is facing headwinds that are likely to result in substantial structural change. Of course, this isn’t a totally unfamiliar situation. We’ve been here before, just with a different sector. In 2016, retail was facing a similar challenge. The details were different, but the overall picture was the same. Lessons from the past The one advantage the office market in 2021 has is the potential ability to take on board key learnings from the retail sector’s experience. Customer knowledge. Understanding occupier requirements will become more important than ever for investors and advisers. Property professionals will need to better understand the underlying drivers that will attract people to their workspace. Offices are moving away from simply housing people to becoming spaces where people generate ideas collaboratively and learn new skills. To facilitate that means ditching traditional open-plan offices and exploring new ways to use similar types of space. Sustainability. The “Greta effect” means that a whole new generation of office workers is rigorously asking questions of their surroundings. Inspired by activists such as Greta Thunberg, they are demanding that the same environmental standards apply to workspaces as to residential locations. The backlash in retail following the unsustainable nature of home delivery packaging could be repeated when office employees become more informed about the level of emissions generated by their office buildings. A proactive, industry-wide, collaborative process needs to take place over the next decade to create genuinely environmentally friendly workspaces and highlight improvements as they occur. Flexible pricing. Office occupiers are baulking at long leases that tie them into substantial financial commitments when their workforce requirements are becoming ever more changeable. The retail sector has embraced shorter leases and is actively exploring alternative rental models. Forward-looking office investors could follow suit. Flexible use. Space that can be used as offices part of the week and then transformed, quickly and easily, for alternative use will challenge the orthodoxy of single-use office space. Investors who help facilitate that change are likely to be well rewarded. New content. New-generation workspace that provides exclusive experiences for employees (say, holographic music events at lunchtimes or after work) fosters employee desire to come into spaces where they can productively interact with colleagues. Investors need to ensure that occupiers seeking that kind of competitive advantage have high-quality connectivity as standard in their buildings. As we know, a retail destination without content is now one destined to struggle. Challenging conditions While virtually all office locations across the UK will need to flex during this period of significant change, it is important to recognise that change is by no means synonymous with extinction. London’s office stock alone totals around 200m sq ft. Demand will continue, not least because some functions cannot be moved easily or securely to domestic properties. That doesn’t mean the challenges ahead aren’t real. With the MEES Regulations removing around 20% of central London’s office stock at a stroke in 2023, and further energy performance-related restrictions a distinct possibility, the days of old-fashioned offices are numbered. But in the same way that the imminent death of retail as a whole was grossly exaggerated and incorrectly predicted, I believe the same will be true for offices. By grasping the five learnings outlined above, the period of change for offices can be less fraught than it has been for retail, as workspace transitions, perhaps, towards a two-tier future, where corporates will continue to occupy prime quality space but smaller organisations fashion “team townhouses” from existing or period premises (also a likely sustainability win). Seeing the opportunities There is a large volume of space that will probably never be occupied as pure offices again. Not that long ago, high streets up and down the country were coming to terms with the realisation that many stores would never be used in the same way again. If the office sector can pick up just one takeaway from that scenario, it is this: redundant office space should be seen for the opportunities it can create, rather than the purpose it is no longer fit for. It has taken far too long for some to realise that ex-retail stock can be successfully repurposed and assist with regeneration aspirations. The transformation of redundant offices – to desperately needed residential space and associated retail and leisure facilities, for example – could happen relatively smoothly and painlessly. And it could create some amazing spaces as it does so. The retail sector learned the hard way. The office sector doesn’t have to. Hannah McNamara is co-founder of P-Three Photo © P-Three