Demand for central London office space to undergo qualitative and quantitative changes
- Latest research from JLL finds demand for high-quality central London office space will remain robust over the cycle – but what companies want from offices will change
JLL’s recent report The future of office demand: Central London after Covid-19 has outlined the implications of the pandemic for medium and long-term demand for office space in London. The research cited that whilst the remote working revolution is here to stay the office will maintain a central role alongside it, providing space for collaboration, teamworking, onboarding, training and, for many, a space for concentrated work. Without it the office, the economic advantages of agglomeration will be lost to the country, companies and workers alike. However, what occupiers want from the office, and the locations they will choose, will shift as the city begins to recover from Covid-19 with implications for developers and investors.
Since March the take-up of new central London office space has slowed as occupiers have paused to assess their options.
While this is expected to remain the case in the short-term, demand for high-quality offices will return strongly as occupiers begin to plan for the recovery. Indeed, an office space in London may become more, rather than less, essential, given that it is by far the most accessible location by public transport in the country. However, occupiers will become more selective in their requirements and this may mean that buildings that do not offer the environments employees need will require significant investment and/or repositioning.
Neil Prime, head of UK and EMEA agency at JLL, said: “Companies that quickly embark on short-term reactive space and cost-saving measures will probably find the results unsatisfactory in due course. When the economy recovers, they will be focussing on sourcing office space in a competitive market rather than having a strategy focussed on talent and growth. We anticipate that whilst those occupiers with current requirements continue to adapt them to provide a different kind of workplace, we don’t expect them to shelve such a central part of their medium and long-term business strategy.”
JLL highlighted that a substantial amount of demand for central London office space is driven by lease events and calculated that there is a total of up to 25m sq ft required for occupiers that have lease expiries between 2020 and 2023. The majority of these occupiers will still need to satisfy these requirements especially if inefficient and obsolete space is not compatible with the post-Covid-19 landscape.
Elaine Rossall, head of UK offices research at JLL, said: “Covid-19 is expected to accelerate many of the physical changes that we were already seeing in the central London office space market. Corporates have moved away from viewing offices as a static and necessary expense as they are increasingly regarded as a showcase for brand and culture.
“Offices are also seen as a key tool for promoting collaboration, agility and innovation as well as assisting in recruitment and retention. Coupled with the physical changes that are expected in the new workplaces, to facilitate a more flexible way of working and an increased focus on sustainability and wellbeing, many occupiers will see the acquisition of new office space as vital to their success. In addition to this, a number of occupiers with fixed lease expiries won’t have the option to remain in their existing space due to redevelopment schedules.”
With regards to the amount of space required by occupiers, JLL did not expect a reduction in density arising from higher levels of homeworking due to the need to facilitate social distancing and provide more collaboration spaces and amenities. It will also prove quite hard to spread office attendance equally over the week. If workers choose themselves when to work, certain days will inevitably be more popular. In this situation – where the office is virtually empty for two working days but packed on the other three – there is little opportunity for occupiers to redesign space or reduce the overall quantum.
JLL found that a potential shift in commuter patterns, facilitated by increased homeworking, may also bolster future demand for central London office space. It cited that if a London-based job only required the worker to be in the office for part of the week then a job in the capital could be more plausible for those who live further afield and would consider commuting two to three days a week. This could lead to more companies locating office space in London as no other location can offer such a large population within a two-hour catchment.
In addition to increasing the number of office occupiers in central London JLL cited that this would also affect its economic geography. A preference for sites close to transport hubs together with the increased emphasis on green spaces and health and wellbeing may further accelerate the trend for new offices being delivered in large-scale campus-style developments on the fringes of traditional central London locations. This shift would provide a particular boost for submarkets such as Euston, Kings Cross, Paddington, Waterloo, the Southbank, Victoria and the area around Liverpool Street.
Undoubtedly, the way that demand for central London office space translates into new ways of occupation will have implications for developers, landlords and investors. JLL highlighted that geographic shifts to the campus-style development will favour some submarkets more than others and that this will be reflected in a more diverse rental and yield profile than has been typical in central London in recent years.
Julian Sandbach, head of central London office markets at JLL, said: “Over the last four to five years we have seen significant yield compression across almost all of Continental Europe, while yields in the UK have remained broadly stable. This means that whereas London was once considered more expensive than its European counterparts, it is now cheaper, and therefore offers comparative value for potential investors. Indeed, when post-Covid changes in bond yields are taken into account, London looks even better value, from a margin perspective.
“The central London office investment market could become more polarised over the next year and beyond, with a widening spread between a more narrowly defined core and a larger set of value-add opportunities. Core properties will generally be those let on longer leases to corporates, with ‘state of the art’ fit-out and sustainability and health and wellbeing credentials, all aimed at propagating brand values and attracting staff. Given London’s relatively high yields, and falling returns in other asset classes, particularly fixed-income, demand for the relatively limited pool of core properties in London and other gateway cities could increase.
“Beyond this core category, much of the rest of the market can be considered to be ‘value-add’ as assets are reorientated for a more flexible future. Investors will have to accept a greater degree of fit-out provision, management, curation and service provision than in the past, as multi-let and flexible leases become the norm.”
Jon Neale, head of UK research at JLL, concluded: “Central London’s office market is going to face a difficult 12 months as tenants reconsider their occupational strategies in the light of Covid-19 and the resulting recession, as well as a future which involves greater remote working. However, London’s connectivity advantages and its young, talented population suggest it will remain one of the world’ most dynamic urban economies, but we expect companies to be far more selective in the quality and locations they are seeking for their offices. The result will be a polarisation in the market, between the relatively small number of buildings that meet these new requirements and a wider range of offices that will require investment or repositioning for this new post-Covid reality.”