Market Insight

COVID-19 and the office evolution: Five things for landlords and tenants to watch

April 15, 2020

Both landlords and tenants are starting to plan how to put their best foot forward to ensure that they emerge from the current COVID-19 pandemic in as good shape as is possible.

In line with this, investors and developers are asking us what occupiers will want from buildings in terms of specification, style, location and cost, so they can deliver the right product which will appeal to tomorrow’s marketplace.

For occupiers, cost avoidance remains their number one priority as they increasingly look to take a more defensive position. 

With this in mind, we expect occupiers will look at implementing workplace strategies to more readily facilitate remote working and will be thinking about where to best position their core office for the best possible accessibility, as well as to enhance employee wellbeing.

So, whether you are an occupier, landlord, investor or developer, here are the five key things that we have identified so far, from our conversations with clients, which you should watch out for in terms of tenant requirements after COVID-19:

Health & Wellness 

In light of COVID-19, we could see occupational densities in offices change as it may be viewed as less acceptable for companies to condense people into space which could potentially contribute to or exacerbate employee health issues. 

As a result, we are likely to see a mixture or more home working / flexibility from employers, now that they have been able to experiment with it and achieve the right balance of technology to deliver, in some cases, more productivity. 

Once social distancing ends and schools and nurseries reopen, more remote working has the potential to deliver a much better work life balance for many. 

Alongside more widespread acceptance of flexible / home working from employers, we may see greater space per person in offices as businesses seek a balance between the potential cost of extra space and greater flexibility around their working practices.

This represents an opportunity for landlords and investors to provide more energy efficient buildings, or target properties with better environmental credentials and outside space as well as larger reception areas, not so much for collaboration now, but to provide open space for employees to work effectively and efficiently in a ‘healthier’ environment. Space to think and breathe and exercise.

Decentralisation

COVID-19 could be a further catalyst for those businesses who had already been exploring the potential to move their workforces out of London into the regions to access a wider talent pool and achieve cost competitiveness. 

The impetus for this now, is to ensure that their employees won’t have to commute on crowded trains, tubes and buses and can therefore enjoy a healthier and more balanced work / lifestyle.

As a result, offices that are situated on business parks which are easily accessible with good parking provision, as well as urban offices near transport hubs or within reach of major road networks, could be favoured by tenants seeking to offer their employees more travel choice – either by car or on what we hope might result in less crowded public transport. Electric vehicle charging solutions may also become more of a priority too. 

Cost resilience 

Tenants will not overstretch themselves now and will build savings and cost avoidance into their property decision making process, factoring in future eventualities like pandemics or economic shocks to their property strategies. 

And when the time comes to make a move, as mentioned earlier, energy efficient buildings with lower running costs will be preferred, as well and those demonstrating good value for money or offering better employee wellbeing benefits. 

This could attract interest to good quality Grade B offices and already fitted space offering value and CAPEX savings, which may fill this gap for now.

Core & Flex space 

Tenants are likely to request greater lease flexibility from their landlords as a precaution against uncertainty on the back of COVID-19 – both in terms of the potential future shape of their businesses and market performance. 

Businesses will want to establish their core minimum requirements for running the company in terms of number of people and office locations. Anything over and above that will be taken on very flexible lease lengths or with breaks.

As a result, landlords could see a preference towards multi-let properties with service charge regimes and with up to 30% of the building on shorter lease terms.

Tenants may also seek lift and shift provisions to move within buildings or across landlord portfolios as a flexible solution. 

Rents

Rent levels will flatten and may fall in the short term as landlord attitude to valuation risk vs income changes.

Owners of less desirable last generation stock or premises in less favourable locations will seek to fill space quickly rather than hold out for the best rent. Some landlords are already priming their agents based on this strategy. 

This will impact on Grade A offices by default, as tenants will leverage the packages they can negotiate elsewhere or the offers they receive, to stay longer in their existing premises. 

That said, prime locations are still benefitting from single figure vacancy rates and so with tighter supply and limited development pipeline we could see a divergence in rents between geographies as some towns retain robust rents whilst others experience falls.

Subtle changes

Over the next three years we expect to see as much as 30-40% of the existing workforce work from home or remotely up to 2-3 days a week.
Those who undertake one-to-one tasks, rather than team-work, will not be expected to go to the office regularly but will still visit as they weave their new workstyle into their regime.

Meanwhile the technology and communications sectors are predicted to emerge better than others. 

Our Vail Williams ‘Demand Project’ has been tracking the preferences of these sectors to advise clients on targeting and delivery. Advances have been made during the pandemic to ensure that their technology will remain a crucial part of our working and home life.

Every 10 years the office reinvents its purpose and COVID-19, whilst not a desirable turn of events, has acted as the catalyst for the next phase in the office evolution cycle. 

In preparation for life after COVID-19, both landlords and tenants are anticipating the next office cycle, preparing now to put their best foot forward and we predict that this will be with a greater level of home working and more office space per head than before the pandemic, with more focus than ever on employee health and wellbeing. 

If you would like to discuss any of the issues discussed in this article in more detail, don’t hesitate to contact our property acquisition and disposal, lease advisory or investment teams for more information.