As office workers across the world gradually return to their desks, this article looks at the key trends in the office market and sets out our forecasts for the future.
As the pandemic closed offices and hollowed out our urban centres, many predicted the death of cities. But in the last 12 months, residential values and rents have climbed across London – in both prime central London and across the suburbs. It is therefore clear that workers continue to want to live in the city, but they value flexibility – what does this mean for the office sector?
We see two environmental pressures – top down and bottom up. The UK government has committed the country to be carbon neutral by 2050 and has passed legislation to ensure this target is met. In real estate, the main weapon is that all properties must have an Energy Performance Certificate (‘EPC’) of E or above to be let; it will be illegal to let a property with a rating below E. This will force landlords to upgrade offices and retrofit insulation, double-glazing, efficient lighting and electric boilers. At the same time, many office occupiers are already seeking energy efficient offices to meet their own ESG targets.
As a result of London’s long history and strong planning framework, many London offices do not meet this new standard. We forecast falling rents and values for such properties, with many being converted to residential or simply standing vacant until consent to change their use is granted.
Many surveys conducted during and post-pandemic confirm that many office workers value flexibility and prefer hybrid working. However, as companies want their staff back in, how can the office assist both parties?
Companies seeking to attract and retain the best talent need to do more than simply offering a competitive salary. In an economy short of workers, individuals are able to pick and choose their ideal employer and workplace. Companies need to offer bright, attractive, best in class workspaces with multiple add-ons; safe bike storage, coffee shops, gyms etc. Whilst hybrid working means fewer desks occupied, more collaborative space is required. Again, we are already seeing premium rents being paid for offices across central London that meet these criteria.
For those making long term office investment decisions, it is also important to understand the demographic changes forecast in most European cities, including London. An aging population means that those of working age are likely to fall by 4 to 11% over the next 20 years (source: Savills) and in the short-term demand for offices is likely to fall by 10% over the next 5 years.
Savills has recently published the results of its Resilient Cities survey. The survey takes into account economic strength, ESG, the knowledge economy and depth of the real estate market. London came second only to New York – replicating the 2016 result. Whilst this is positive news for the London office market, it should not mask the long-term trends that I have highlighted.
In conclusion, London remains an attractive location for office investment but now, more than ever, it is critical that prospective investors understand the regulatory framework and the changing demand from occupiers – both of which should lead investors to focus on energy-efficient, flexible buildings that are able to adapt to changing work patterns and ESG concerns.