The office is changing – and that means a shift in the real estate market, too
When businesses emerge from lockdown, many will seek ways to reduce their operating costs to maintain margins in a post-COVID-19 world, when revenue generation is likely to be appreciably more challenging.
Real estate often represents the second largest operating cost of most businesses, after staff salaries.
It’s regrettably very likely, then, that headcount and office space will be the first to go for firms looking to tighten their belts amidst an uncertain recovery.
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Vacancy in the second-hand office market is expected to increase as businesses sub-let surplus space and introduce more efficient ways of utilising the real estate that is to be retained – with a greater emphasis on home working.
But there’s a fly in the ointment – the Government’s new guidelines on ‘social distancing’ in the workplace.
Employers will be required to reduce their office occupancy densities, which typically average 90 – 110 sq ft per person, including an allowance for ancillary accommodation such as meeting rooms, reception and kitchen space. Businesses will therefore have to change their current seating layouts and operating practices to reduce their occupation densities to minimise the risk of a re-occurrence of the COVID-19 pandemic.
Employers will need to take all steps necessary to reassure employees that it is safe to return to their usual place of work.
Social distancing in the workplace will therefore have a profound effect on the way that real estate is occupied and how businesses operate.
Floor space that might otherwise have been surplus to requirements, and earmarked for sub-letting, might now have to be retained to provide sufficient floor space to meet social distancing guidelines – scuppering a business’ ability to offload real estate to reduce costs.
However, a substantial majority of the UK workforce has now had the experience of working from home for a prolonged period which may lead some employers to focus more on home-based working accommodation strategies, to meet the requirement to reduce office occupancy densities, with teams or groups of workers attending the office only two or three times a week, on rotation, to collaborate on projects.
However, if social distancing workplace policies are too draconian they are likely to undermine team collaboration and lead to an austere atmosphere that will discourage home workers from traveling in to the office. A careful balance will be required between personal safety, team productivity and maintaining a vibrant, attractive, working environment.
Social distancing in the workplace will also have a significant impact on the serviced office sector which is predicated on a high-density headcount business model in order to secure commercially viable returns. The need for employers to adopt a lower office occupancy operating model is likely to lead to structural change within the serviced office sector. Some operators may cease trading unless they are able to restructure their operating costs by negotiating lower rents with their landlords. WeWork’s well publicised pre-COVID-19 funding issues, brought about by overcapacity, is emblematic of the fact that the serviced office sector was already struggling before the pandemic.
Pre-coronavirus the talk in the London office market was about the lack of available good quality space to meet demand.
Occupiers were prepared to pay record rents to secure the best space, which was increasingly being used as an integral part of corporate recruitment strategies to attract the brightest and the best. The priorities of many businesses are now likely to have shifted away from recruitment and towards the safety of their current workforce. The challenge, now, for office occupiers, is to formulate operating and employee wellness policies that are compatible with reducing real estate costs to maintain profitability.
Finally, there is also the key issue of getting the workforce to the office. How are employees to be reassured that using public transport will not be detrimental to their well-being? Phased shifts that are compatible with travelling outside peak commuting times might be one answer.