EDITOR’S COMMENT Higher interest rates, hybrid working, rising obsolescence, falling rent collection figures. The office sector continues to be bashed around as it resets post-pandemic. While the period where we couldn’t get through a day without hearing the phrase “the death of the office” may have passed, the sector still feels like it has fallen out of favour.
Figures this week showed the average office lease length in the UK had dropped by 34% from 52 months in Q1 2019 to 34 months in Q1 2023, with leases of 12 months or less making up almost half of those signed in the first three months of this year. Leases of more than a decade now account for just 1.5% of all leases.
This shift to shorter agreements means the office has to work harder to hold on to its tenants. That means more investment, more often. That means more thought into our spaces and greater focus on tenants and what they need.
This week we also heard that rental collection across the commercial sector fell to its lowest level since the depths of the pandemic, with just 56.2% of office rents being paid on the June quarter day.
Couple that with the continued contagion that spreads from the US, where some banks are refusing to lend on offices and many others are upping their provisions to cover losses on commercial real estate loans, and you wouldn’t blame anyone for turning their back on the sector. There are plenty of other places in real estate to invest your money after all. Why not join the trophy hunters in the life sciences world, or look to data centres, a sector that can only grow as we all continue to digitise.
However, this week, not one but two champions of the sector emerged.
In Manchester, footballer-turned-property-developer Gary Neville made a big bet on the future of offices with his £400m St Michael’s scheme. The project, which will deliver two new office blocks in the city, alongside hotel and leisure space, has already secured two big-name tenants at new record rents for the city.
And, regardless of the economic environment and the new normal for the office sector, Neville believes in the future of the scheme.
He told EG: “This development is a huge risk… but you need people who share the passion and belief in Manchester city, and our [partners] Salboy, KKR and Manchester City Council have definitely got that in abundance.”
In London, Mike Hussey’s Almacantar has made an even bigger bet on offices, quietly pulling together owners in one of the City’s most unloved locations to create the potential for a 1.4m sq ft office-led development at Puddle Dock.
While the world talks down the office sector, Hussey and his team believe demand is there for 900,000 sq ft of new office space in the heart of the capital.
It is a fillip the sector needs as stories about unpaid rent, falling lease lengths and obsolescence gain more headlines than the stories about demand.
EG’s own data shows rising demand for office space from tenants across the country, with Manchester and Glasgow being particular hotspots for enquiries, while figures from Savills show demand for central London office space is up by more than 10% on the 10-year average. It reckons there is 9.7m sq ft of active demand in the capital right now.
Neville put it perfectly this week: “You need good partners, good teammates, you need persistence, and not to lose faith in what you’re doing.
“Anything that’s worth achieving in life takes hard work and determination and good relationships with partners, and that’s what we’ve got.”
It’s a good pep talk for the office market – perhaps for the real estate industry as a whole. We have to fight hard and we have to work together to make sure real estate shines again.
To send feedback, e-mail samantha.mcclary@eg.co.uk or tweet @samanthamcclary or @EGPropertyNews
