‘Death of the office’ premature says RICS

Global and UK focused sentiment surveys confirm shifts in attitude to office space and property performance but other research provides a glimmer of hope, writes Paul Strohm.

While some office workers go all misty eyed about the “office vibe” that has been missing since the Covid 19 lockdowns were introduced and cannot wait to get back to working shoulder-to-shoulder with their colleagues, others are wondering why they were not allowed to work from home before.

They think that in future a few outside-rush-hour trips to the office each week will suffice and are perhaps wondering what they will do with the kids and the new puppy if they have to go back to the old way of life in 2021, if not before.

But the future of the office market greatly depends upon the reactions of the employers of those currently remote office workers. After all, they pay the rent and many are desperately juggling finances against a backdrop of falling GDP.

Approaches to office life as the world recovers from Covid 19 will no doubt vary widely and the “normal” to which we return could be anything but that.

Organisations are likely to reduce their overall footprint, put greater emphasis on suburban rather than urban locations and they will place a greater premium on the health and well being of workers, according to a global sentiment survey conducted by The Royal Institution of Chartered Surveyors.

The Global Commercial Property Monitor also states that over half of the property professionals that it polled world-wide think office footprints could shrink by up to 10% in the next two years and a further third thought the reduction might be greater.

Reduction of office footprint

Another RICS survey which focused on the UK reported that 93% of respondents envisage businesses will reduce their office footprint over the next two years while 64% of respondents think offices will move to the suburbs.

These prognostications have a predictably unwelcome outturn for investors. In the UK, prime office rents are expected to fall by 4% and by 7% for secondary space over the next 12 months. Globally, over a third of investors polled expect capital values and rents of commercial property to fall in the same period, says RICS.

“There will be no going back to the old normal,” according to RICS chief economist Simon Rubinsohn.

“Underlying trends have been accelerated by lockdowns, whether the global rise of e-commerce or remote working coming to the fore, changing the nature of demand for many traditional commercial assets. We will see investors, landlords and tenants continue to adapt to a new reality – not least in their approaches to office space.”

There is some good news on the supply side of the property market equation. Investor AEW’s research arm, led by Hans Vrensen, believes that any oversupply of offices is likely to be muted and that the situation compares favourably to the Global Financial Crisis.

New office supply low

The firm says new supply remains at less than half the level seen pre-GFC. For the 2020-2024 period, AEW says new supply is “fairly limited” at 1.3% of existing stock pa compared to the pre-GFC figure of 2.7%pa.

For this we can thank construction delays caused by Covid 19 itself, investors and developers postponing or cancelling projects on the drawing board, plus a tougher post-GFC banking regime that has restricted the extent of speculative development.

Of course, there are regional variations and AEW points to markets in CEE, Dublin, Barcelona and Paris which do have more substantial pipelines.

While AEW confirms that prime office rents in Europe will fall by 9.8% on average this year, it says the demand shock will be short lived and rental growth will recover from 2021 achieving 2.5% pa in 2020-2024.

Market strong pre-COVID

Europe’s office market displayed “strong fundamentals” before the pandemic began, the firm points out, with record office take-up of 12 million sq m in 2018-2019 and historically low vacancy at 5.4% by Q1 2020.

And, although the European vacancy rate increased by 20bps to 5.6% in the second quarter of this year it is significantly less than the previous downturn when it was 200 bps higher than today.

RICS’s global property standards director Paul Bagust’s view is: “The commercial office sector is under pressure, but the ‘death of the office’ has been called far too prematurely.”

He adds: “Rather than disappear, office use will evolve. Property strategies will be increasingly data-led, based around the performance of buildings and how they add value to and support the productivity of employees.”

Others too are viewing the current situation with some optimism, a time of opportunity. Former Brockton Capital executives Sanjay Sethi and Max Bassadone have launched Tokoro Capital which has closed its first fund, TKO-I LP with capital commitments of €100 million which with leverage gives it €250 million to spend.

Tokoro is targeting office investment opportunities in Europe’s gateway cities, “employing a relative value strategy to allow it to invest through the cycle whilst seeking to take advantage of pricing dislocation which is expected to be exaggerated by current market uncertainty.”

Target investments will have a lot size between €20 million and €100 million and initially the firm will focus on London and Paris.

“Well located, highly amenitised offices offering a carefully curated mix of indoor and outdoor space will continue to be highly sought after,” says Tokoro Capital co-managing partner Max Bassadone.

Paul Strohm is a freelance property journalist