EDITOR’S COMMENT: There has been so much debate over the future of the office that, if I’m honest – and I’m sure I’m not alone in this – I’m completely bored of it.
The office really isn’t going anywhere. We are always going to have them. Not enough of us live in homes where we have space to work effectively, efficiently, and comfortably, and too many of us work in businesses where human contact is not only necessary but actually quite enjoyable.
What probably is going somewhere when it comes to offices is values. I have no doubt that demand will remain for office space, but what I do doubt is how much occupiers will be willing to pay for it. They may well need almost as much space as they occupy today as employees demand more collaborative spaces and a more appealing working environment, but will they be willing to pay as much per sq ft if they are not using the space in the same way?
The early indications are – potentially not. New research from Carter Jonas this week (p13) shows that occupiers are increasingly holding all of the power when it comes to negotiation. Not only has Covid-19 allowed them to sidestep their rental obligations for more than a year, but it has enabled occupiers to demand rent-free incentives of upwards of a year on five-year leases. That means that property owners are effectively having to give away one-fifth of their rent to attract tenants.
Carter Jonas’s research reveals that this increase in rent-free periods (by around one quarter) is having a costly impact on even London’s most prime offices. Bifurcation is a word that is increasingly used when talking about offices (indeed, we use it in our London office market analysis on p18) and the separation in fortunes between Grade A and everything else. Tenants will pay top dollar for the very best space, we hear – everything else runs the risk of obsolescence.
And while headline rents for prime offices remain solid (down by just 1%, according to CJ’s figures), in real terms rents in the most prime of all of London’s hottest office spots – Mayfair and St James’ – have tumbled by more than 11% over the past year, from almost £95 per sq ft to £84 per sq ft. And all because occupiers are now asking for an extra three to five months rent-free.
And landlords are playing ball. They have to right now. An occupied building, even if it fails to deliver a rent for 12 to 16 months, is always better than the cost of holding an empty building.
For now it seems that the future of the office is increasingly rent-free, as the balance of power remains firmly in the hands of occupiers. The office market is cyclical, of course, and that balance of power will no doubt shift when space (good space) becomes sparse, and the vast majority of the working population realise that office working is much better than home working. But in the meantime, I can’t help but wonder what impact this is having on the business of real estate.
Real estate is such a powerful contributor to the UK economy. It is vital in bringing about investment in our towns and cities, in enabling government to achieve on so many of its agendas. But if it is increasingly forced to give away income and value, what does that mean for its ability to invest?
It’s a question that needs to be considered carefully by leaders across the country, for without real estate there is, I would wager, no hope in government ever achieving on any of its agendas.
To send feedback, e-mail samantha.mcclary@eg.co.uk or tweet @samanthamcclary or @EGPropertyNews
