UK Leasing

What future for the UK office sector?

Business Leader brought together seven industry experts for a debate on the UK office sector and to assess current levels of use, inbound investment and mixed-use developments.

Panel for debate

• Hayley Blacker: Director, Interaction
• Dr Walter Boettcher: Head of Research and Economics, Colliers International
• Richard Bonner: Commercial and Operations Director in the United Kingdom, Arcadis
• Jo Charles: responsible for sustainable development, Willmott Dixon Construction
• Tom Morris: Managing Director, CBRE
• Toni Riddiford: Office and Workplace Manager, Stride Treglown
• Sarah Trahair-Williams: Associate Director, Cubex

Does the pandemic pose a threat to UK offices? And how do you assess the outlook for the commercial real estate industry?

Dr Walter Boettcher: “If you read the press, you might think so, but I don’t think so. Computers were supposed to get rid of paper in the 1980s, but office paper consumption has increased by 80%. I think it will be the same for offices.

“Some trends that we are seeing however are that the pandemic has accelerated flexible rental and back office plans for many businesses. I would also say that the ESG and sustainability agenda has received a boost over the past year and the sensitivities around the workplace have changed forever.

“Let us not forget the sector for all that, because real estate is only down by -1.5% compared to finance which is -2.3% and the hotel industry which is down by 50%. . It has been resilient and the collection of office rents has also held up, with 92% collected in 2020 in London and an additional 5% in payment plans. Regional fares outside of London are even better, with 98% collected in 2020.

“Finally, if we can regain renewed confidence on the transaction side and not just on the occupier side – and that will come from investor confidence – then we will also be looking at a sector that will enter growth territory next year.”

Tom Morris: “Of course the last year has been tough for the office market and the big question now is how much office space do people want? I’m optimistic on this front, and while a new way of working will be here to stay, many businesses will still need office space. Just look at Google, which will now host 60% of its workforce in its offices, for a three-day week. “

Hayley Blacker: “I am also optimistic and what I am seeing in the office market is that small and medium businesses are confident about their return and that their teams want to return to an office. Yes, that will change with quieter spaces, fewer offices, and different design and layout choices, but it’s happening.

“Businesses and large corporations are a little more hesitant, and they always decide what to do with their space; but I believe that in the long run, many will keep their office space. I would also close by saying that the owners are now starting to look at their portfolios.

“Homeowners are also looking at their portfolio and seeing how they can adapt their offices to build them better and embrace sustainability and wellness. “

Toni Riddiford: “I still see long-term confidence in the viability of offices as a physical space, albeit in a different form and with hybrid work in mind. Workers generally seek separation between office and home, but this must be weighed against the needs of each business.

“Certainly, with the office space, I see a rise in standards and an acceptance that good is no longer enough. Additionally, if office footfall is no longer the default, we also need to educate ourselves about the space around the offices and how to make it even better.

“Monofunctional locations are also likely to be challenged and the most successful destinations will be flexible and have a choice. “

What role will multi-use and mixed developments play in the future for the office sector?

Sarah Trahair-Williams: “Mixed-use developments hold the keys to larger and more prosperous urban centers, as all generations increasingly want to live, work and play in central areas without a car.

“The recent High Court ruling for Sports Direct and Mecca – requiring that accrued rents be paid – is also interesting as retailers will have to decide if they continue, and this could see retail assets that will need to be paid. reassigned and this is where the development opportunities lie.

“Finally, I would also say that, more generally, we need to make sure that we’re not just pushing the new home program and that we need to consider commercial properties and mixed-use development spaces, as the office is not dead and there will be a requirement for office and retail.

This has been mentioned, but what practical measures are being taken around the sustainable development agenda?

Jo Charles: “The built environment accounts for 40% of carbon emissions in the world and 11% of these come from the construction of buildings and 28% from the operation of buildings. This shows what an influential role the industry can play and to bring those numbers down we are now seeing leaner construction methods and some construction methods even taken offline.

“The use of local suppliers is also increasingly widespread and questions are being asked about supply chains and the performance of buildings and products. Investors are also very attentive and support projects that meet certain sustainability criteria, and they demand more from developers. “

How is foreign investment in UK commercial office space holding up?

Walter: “As you can imagine, it has gone down, and it’s not only because of Covid-19 but also because of the Brexit before it. What will be essential in attracting foreign investment in the commercial real estate sector will be mixed-use developments and the rental construction sector.

“We don’t just want to over-build housing, and cross-border investors are now aware that if there is a mixed-use development that has residential spaces, offices, and retail or hobby or industrial storage – it has the ability to mitigate risk in their investment portfolios, making them desirable investments.

“The return on a residential and commercial real estate mix has been 4-7% per year, but the volatility has been zero. Compare that to industrial volatility, which has been high, for example. Mixed use and reallocation of assets preserves economies of scale by bundling certain activities, which is why they are attractive to investors.

Richard Bonner: “Foreign investment will be boosted by the growth of the regions, and there is a clear government program to support areas that are also seen as being left behind. However, each region must create an attractive offer, explaining why it should attract foreign investment, and there must be a very clear plan for collaborative investments from the public and private sectors.

“The right industrial strategy is also important to ensure that companies invest. I would also like to point out that one of our clients, Henderson Asset Management, has just signed for 90,000 square feet of office space in the heart of London. This is underpinned by a solid business case for good office space and a sign of future intent. “

Tom Morris: “Transactions in the office market amounted to £ 4 billion last year, 30% below the average for the past five years. Indeed, people were not able to move and it was difficult for investors as they could not get to the UK which of course had an impact on investments in the UK real estate sector. .

“There are also barriers to the approval of deals by investment committees right now due to moratoriums on rents, but that will start to unblock and the certainty investors need will come with it.”

How did the rental rates hold up?

Tom Morris: “Better than expected, as we expected, we might see headline rents falling, but that hasn’t happened in the big cities. Take up levels were of course down, with for example London at 55% and the South East at 30% because the occupants were unable to make business decisions and renewed the current leases.

“It wasn’t because of a refusal to move and invest, but a statement that they won’t do so now but potentially in the future.

“With cities restricting supply like Bristol, demand fell only 14%, which allowed rents to remain stable.”

What are the main threats for the sector in the future?

Walter Boettcher: “All I hear and see are opportunities and we have been prevented from moving these agendas forward, first because of Brexit and now because of the covid pandemic. But I feel that we are on the cusp of a great generational change. I remember a few other times in history where we were supposed to change but we didn’t, but it looks different.

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