Changes to the property sector: Opportunities and threats for investors and occupiers (Part Two)

In this two-part article co-authored by CEO of Gerald Edelman, Richard Kleiner, and Director of Spring4, Chris Aquilina, we will focus on issues surrounding the property sector. Part One covers that of commercial property, most notably retail, whereas Part Two focuses on office spaces and the changing working environment.

The corporate world underwent major changes in 2020. Back in March, the growing concern over the spread of Covid-19 forced many businesses to pack up and close their offices for the foreseeable future without having a plan in place. Suddenly, businesses that had never worked remotely had to adjust to Microsoft Teams meetings, virtual lunches and remote socials.

With this came a huge shift in the way we approach working life, with many believing that the traditional office framework will now become obsolete even faster.

The pandemic caused sudden change, and the change brought both opportunities and threats. Here, we discuss what’s next for the corporate property world and how investors and occupiers will be affected.

Investors

2020 was not kind to landlords. Many are yet to receive rent payments in full from their existing tenants since the suspension of the eviction notice set in March 2020. Additionally, thanks to a vast increase in working from home practices and moving operations online, business owners are no longer tied down by their office leases or constrained to an office at all.

Lease expiries were often perceived as a source of risk amongst occupiers, particularly where the leases excluded the security of tenure provisions of the Landlord and Tenant Act 1954. Until now it had been considered crucial to ensure that the expiry of the previous lease dovetails into the lease of the new premises, including a period for fitting out. This was required in order to have a smooth transition from the old building to the new. The fear of being made corporately homeless has largely evaporated following the experience of the near overnight lockdown last year.

There are increasing instances of occupiers being willing to allow existing leases to expire without having made a commitment to new premises. Many businesses are now taking a ‘wait and see’ approach which is not good news for those that own office investments.

Is the office really in decline?

There are of course some that believe the reported demise of the office has been greatly exaggerated. Of note was the Brookfield proposal to take their real estate investment arm private, on the basis that it is undervalued by the market considering the pandemic.

Landlords will also play a vital role in enticing people back to the office by adapting and offering a service rather than merely a ‘space’. Commercial properties that boast facilities like gyms, restaurants and wellbeing centres will be in higher demand. Conventional landlords should consider becoming providers of shared facilities such as meeting rooms (as is done in some parts of Continental Europe) to attract tenants on the basis that their competitors in the serviced office market who survive the downturn are likely to have a renaissance.

Occupiers

Tenants now know that circumstances can change overnight, meaning alternatives to traditional leases and office-bound, five day working weeks have been considered. Many occupiers will shift towards flexible occupancy of social workspaces. In an uncertain landscape, tenants will increasingly seek communal workspaces rather than their own, where they can turn up a few days a week and commensurately reduce the cost of an office.

Whilst many workers are fed up with ‘living at work’, others have become very comfortable working from home and may need convincing to return to the office. As such, businesses must provide offices that are worth leaving home for if they are to encourage their staff to return.

Risks of working from home

Businesses need to develop a flexible company-wide policy to avoid the risk of teams becoming divisively split between those that largely work in the office and those that principally work from home. Thought needs to be given to this issue to ensure that two camps do not emerge.

The arguments in favour of homeworking depend on whether one is talking from the perspective of the employer or the employee. Businesses enjoy cost savings that result from closing offices and workers relish avoiding the cost and wasted time of a commute. The analysis that companies need to make is whether the potential loss of innovation and in-person collaboration overshadow productivity gains made from staff not having to commute and cost savings from closing offices.

The office undoubtedly has advantages over home working when businesses wish to build and maintain a cohesive team. As we have seen, companies can temporarily operate very well remotely because teams have built up extensive social capital over many years of working together. This capital gets eroded over time as teams work apart.

As new people join a business, they will do so without these pre-existing relationships and face-to-face interactions, diluting the cohesiveness. It is particularly challenging for new graduates entering the workplace. So much learning that is needed in the professional world is achieved by osmosis in the office.

Looking to the future

As with many complicated issues, the disappointing conclusion is that ‘it depends’. There are undoubtedly opportunities and threats for both investors and occupiers. Both parties must accept that the future of the office is neither dead nor alive and kicking in its conventional guise. The truth is probably that it lies somewhere in the middle.

It will be important to look to the future of the sector and accept the necessary shift towards hybrid working. Those companies who embrace the changing role of the office will undoubtedly see better results.