Brexit, the pandemic, and the emergence of hybrid working are driving increased demand for quality working environments in the city centre.
Grade A office space in the central West End is leasing at record levels even though most company directors and HR departments have yet to fully entice staff back to their desks. So how did we arrive at this paradox? Anthony Lorenz of The Lorenz Consultancy looks at how the past two years have shaped today’s emerging trends.
Emerging trends in the commercial property market
- A new hybrid working model is driving demand for quality over quantity with less square footage needed on average.
- Record rents for properties in Marylebone, St James’s and Mayfair have been secured due to a massive shortage of quality space. In some cases, we’re seeing rises of 25-40% compared to pre-pandemic levels.
- Company directors, HR and Health and safety professionals are entirely focused on the acquisition of modern, refurbished spaces with the latest ventilation, cooling and heating systems. This no-comprises approach has broadened the gap between Grade A and Grade B offices, leaving many older premises that do not meet the new standard standing empty.
- Demand for high-end office spaces in central London is far outstripping supply following a slow-down in the construction and the refitting of spaces. Some businesses are being forced to consider smaller spaces over several floors or self-contained buildings that they may not have previously contemplated.
- Our survey of 8,000 office tenants revealed that 70% of company decision-makers had not agreed on a long-term working model. However, most reported a hybrid working arrangement is likely, combining 3.5 days in the office with 1.5 days working from home.
- Some companies are championing a full-time return to the office. Yet, most employers seek to balance the attraction and retention of staff with their developmental needs through hybrid working. Office working is still highly valued for its collaboration, creativity, mentoring, social contact and relationship-building opportunities. It is feared that a 100% remote working pattern would hinder the personal development, visibility and prospects of younger staff in particular.
- Many landlords, still recovering from the financial disruption of the pandemic, have yet to refurbish their offices to the specification today’s clients are seeking.
The situation as we see it
“If I were asked to summarise how the pandemic and migration to hybrid working has affected the central London office market, I’d say less square footage and more quality for the same overall cost.
“A hybrid working week is allowing companies to take less square footage, and yet even now, 70% of businesses we talk to have not decided on their long-term plans with the majority of staff still working from home.”
Anthony Lorenz, The Lorenz Consultancy
How did we get here?
Office space in Central London has long been hot property though the preceding few years have created a new level of scarcity and regard for modern refurbishments.
The pre-pandemic landscape, Dec 2019
In the run-up to the election and with the uncertainty of Brexit ahead of us, we witnessed a slow-down in decision making from our clients. Companies, already grappling with the implications of Brexit, became even less sure-footed in the run-up to the election. There was a short-lived boost to the market when Boris Johnson was elected, and we anticipated a boom in January and February 2020 as activity ramped up.
Our world turned on its axis overnight. As news of Covid-19 started to dominate the headlines, we saw multiple deals fall in quick succession, including 4,000 ft in Mall Street, buildings in New Kings Road and restaurants in Fitzroy Street and Cavendish Square. On 23 March, Boris Johnson announced the first UK lockdown while Donald Trump blustered that the virus would all “go away with the heat in April”. Many economists and medical experts forecast a disruption for a three- or four-year period. Understandably, the commercial market stalled as the nation worked from home, setting in motion a migration to technologies that aided remote working.
Companies claimed considerable increases in productivity as their staff adapted, abandoned their commute, and often invested more working hours to try to assure their positions in an increasingly fragile economy.
April to August 2020
As the furlough scheme launched, the office market in central London came to a complete standstill, except for those serving break clauses. Employees and company leaders alike reeled, and job security was heavily impacted. We facilitated very few acquisitions and proper disposals as companies debated what the working life of tomorrow would look like. When deals did arise,
tenants were awarded massive reverse premiums for entering into an agreement. Homeworking remained the norm, and construction on new projects slowed or halted.
September to December 2020
As a new-three tier system of Covid-19 restrictions emerged, companies tentatively started to plan, buoyed by a greater sense of structure and a sense that the worst was behind us. We began to see increased market confidence as the initial perks of home working were countered by evidence of downturns in staff wellbeing. Management began to underline the value of their teams coming together to collaborate, learn, discuss and be creative. Divided opinions emerged, with some companies promising ongoing flexibility while others sought a whole-sale return to the office. However, the lockdowns kept coming, quashing any green shoots created by the vaccine approval over Christmas and into New Year.
January to September 2021
After a stagnant start due to four months’ lockdown, the easing of covid restrictions and the vaccine rollout created more confidence in the market. We saw a competitive market re-emerge in the West End, and just after lockdown, those brave enough to pounce benefitted from some amazing deals in the city. Still, uncertainty prevailed, and many companies without break clauses on their current premises delayed decisions to see whether a three- or five-day working week would win.
The current market
As companies seek to attract their workforce back into central London, a highly competitive market has emerged. In highly sought areas like Mayfair, this is fuelling hyper-vigilance from occupiers prepared to take a five or ten-year lease rather than renegotiate in the short term. High-end office space is in short supply and fully refurbished, ready to let premises are demanding record rents. At the same time, there is no demand for poor quality or outdated spaces given the far fewer numbers presently doing the daily commute.
Our final thought? It has to be for any clients deliberating how to exit existing leases and market their space effectively. Andrew Knights, Head of the Agency Department at Lorenz Consultancy said: “Good presentation is key. You should give thought to how to stage the space. Use colour, attention to detail and furnishings to set the scene and don’t forget to communicate well with your landlord.”