Market Insight

All hail the Third Office

June 8, 2021

It’s the 9.00am to 5:30pm, everyone is packed in neat rows of desks. The manager is in a glass box in one corner, a water cooler and a grotty kitchen in the other. This is the First Office.

Years ago, many began to toy with the idea of the Second Office – and then the pandemic forced it upon us all – full time.

Working from home – no problem at all for those with good wi-fi, desk space and a spare room. But an increasing nightmare for those penned up in a pokey flat, perched on a bed, desperate for some face-to-face contact.

You will hear people argue First Office versus Second. There are merits and downsides to both. Most agree that cutting out the commute has been brilliant. Many, though, hate the ‘blur’ of home-work space. Thus, the Third Office has been born: an office close to home but which, crucially, is not home.

Flexible serviced offices or co-working space, just for you or a small team. Chic furnishings, plush meeting rooms, frothy coffee. A friendly buzz of productivity and creativity on your doorstep – but a decided step away from your house.

Whilst corporates closed larger offices during the pandemic, demand for serviced offices increased. Industry polls have suggested increasing numbers of businesses expecting to make use of regional co-working and serviced office solutions for their staff. Indeed, globally, the serviced office market is expected to grow by some 21.9% in 2021 to £23.2 billion[1].

When lockdown lifted, it became apparent that the First Office would never be the same again.

Make way for the Third Office: more collaborative space, more chic, more frothy coffee. Gone are the 20-year leases for staff to work the proverbial nine to five, seated in neat rows next to each other. All hail the flexible terms and ‘in two/three days a week’ rota!

Take-up of offices was poor in 2020 for obvious reasons, with figures in the 12 months to Q1 2021 the lowest recorded since 2004[2] at 3.1m sq ft.

Whilst it is difficult to dissect the type of offices that 3.1m sq ft comprised off, office agents and industry commentators are reporting the strongest demand for higher quality, smaller and more flexible accommodation.

As a result, landlords are pre-fitting space to Cat A+ standard in order to attract tenants and secure the best rents. Secondary and dated stock, meanwhile, sits on the market waiting to be converted to studio flats.

Local logistics warehouses

In 2020 it was forecasted that UK consumers would spend £141.33 billion online, up 34.7% on 2019, with e-commerce accounting for 30% of total retail sales in the UK for the first time.[3]

The UK is buying more online than ever before and this trend is set to continue, resulting in a booming warehouse/logistics sector.

Our increasing reliance on ‘last mile’ logistics seems likely to draw warehousing closer to all our lives. The out of town/motorway junction/backstreet industrial estates will not disappear, but they may be joined by inner town, edge of neighbourhood or even street corner warehousing.

With increasing demand for speed and efficiency, delivery and ecommerce businesses have every reason to hold stock as close to their customers as possible.

But a warehouse on a street corner will necessarily need to be in keeping with that street corner. Shiny spray cladding and a curvy roof may not cut it. We will require real architecture. And even the more traditional ‘out of sight’ industrial estates will surely need to improve as the market shifts to ever more reliance on logistics.

Energy efficiency, improving warehousing technology, the demands of logistics occupiers – these pressures will and are driving a revolution in the industrial/warehouse unit.

Concrete portal frame sheds with asbestos roofs are so passé. Think instead: super high-bay; solar and translucent panel roofs; bee bricks and bat boxes; laser controlled drones and robots. And on the street corner? Shopfronts; self-service click and collect with a careful, attractive design.

Indeed, driven by record levels of demand, an increasing proportion of warehouse availability nationwide is being delivered by development, either speculatively or on a D&B basis to suit occupiers’ specific needs. Meanwhile, about three quarters of logistics property take-up in 2020 was of newly built warehousing.

Dark kitchens and dynamism

The pace of life is getting faster all the time. The world is connected by instant communication, instant media, global trends and hashtags.

Imagine telling yourself when you were twelve, that you would take for granted a pocket HD camera-TV-MP3 player-internet browser-satnav. And not only take it for granted, but be terribly frustrated by it when it takes a few seconds longer than it should to download a new app!

Real estate is traditionally viewed through a long-term lens. Once a building is built, it is (or should be) permanent. Leases, legislation, planning, business needs – these things have historically been agreed and put into effect for years and decades at a time.

What we are now seeing is an increasing trend towards shorter leases – particularly of office and retail property. Flexibility of property use seems to be following suit. More dynamic approaches to rent and landlord-tenant relationships will, and in some cases already are, up next.

In the US, many shop rents are based on the tenant’s turnover (capped and collared) necessitating a collaborative tenant-landlord approach. There is talk of some British landlords beginning to emulate this.

Recent E Class planning use allows for a plethora of different commercial uses in a single building – from café to industrial space to yoga classroom – without requiring Local Authority approval. There are even rumours of defunct town centre shopping centres becoming offices, labs and gyms.

Many of us have come to expect instant service, dynamic responses and spur of the moment decisions. Where I live in Brighton, I can have any type of food from around the world delivered to my door in less than 30 minutes.

Thus, the recent slew of ‘dark kitchen’ requirements which have been circulating in the market recently. Dark kitchen – a non-customer facing premises for preparing food, varying from one-off kitchen counters to former retail units to whole warehouses.

These are examples of how property is, and will need to, change to keep up with modern expectations – and those owners and occupiers who decipher these changes and translate them into action first, will get the best value from their property.

Of course, there will still be a place for a long term, institutional commitment to property – but, as with so many other aspects of life recently, real estate is about to undergo another revolution.

The third office, the neighbourhood logistics plant, the dark kitchen – these are just the start.