Patrick Anderson – The Office is Dead, Long Live the Office

Much has been written about the demise of the office following a purported limited return to work and a future of hybrid working. However, current debate tends to view this as a new phenomenon; in fact, “home working” and hybrid working was a material “thing” prior to the pandemic. The ONS reports that approximately 8% of the UK workforce worked mainly from home in 2019 and a separate pre-Covid ONS survey found 1 in 8 working adults reporting working from home (a material percent considering that ONS data also shows that only maximum of 49% of the total UK workforce percentage worked from home during the government-imposed restrictions).   The pandemic may have accelerated these trends and definitely introduced “Covid keepers” into the workplace arsenal. 

While not new, the rapid evolution has changed the way we think about offices and the reality of how we use offices. The lens through which most commentators view this narrative has focused on averages. For example, the US is reported to be at 50% office working. This average ignores major regional variations and likely coincides with a shifting US urban landscape. In the UK, the picture is more nuanced. Remit Consulting reports that average office occupancy in the UK in April was 27.9% Monday to Friday, and in London, this average falls to 26.5%. Again, these averages hide huge variations by business size, region, and sector; for example, Remit notes that the West End London submarket see occupancy of almost 50%. Based on our own office portfolio, there is a clear trend with smaller offices seeing a significantly higher return to the office. We believe that SMEs are at the vanguard with other major occupiers playing catch up. This is evident by statements from a wide range of larger enterprises from AO who banned remote working at the beginning of 2023 (while simultaneously reducing its Salford office by 80%) to Amazon who is now asking staff to be in office at least 3 days a week.

% Difference in Attendance (Current v pre- Covid. 100% = pre-Covid)

Regional REIT, a listed regional office investor, reported in its recent earnings that a full 99% of its tenants have returned to office in some form. Anecdotal reports of higher office attendance are supported by our empirical data. As a result, we believe the uptake is likely higher than that implied by simple averages which are heavily influenced by office occupier cohorts like the public sector who remain significant outliers in returning to the office. Our house view remains that the office is here to stay particularly as it offers compelling benefits in terms of culture, training, collaboration, wellbeing and, most importantly a feeling of inclusion and belonging for employees.

Clearly, the use of the office is evolving; many companies are adopting “office first” policies setting expectations for at least three days in the office or a policy of home working as an approved exception. While remote or hybrid working may settle at a higher level than the pre-pandemic trend line, offices are here to stay as a critical component in the business toolkit.

As office uses are evolving quite rapidly, hybrid working is enabling some larger firms to shrink overall office footprint requirements, but occupiers are not abandoning the office entirely. Increasingly occupiers tell us they want best in class facilities and see the office as a material part of staff retention, ESG and carbon reduction strategic goals. Collaboration space has become more critical which, despite the increases in hybrid working, has actually placed increased peak demand on both formal and informal meeting spaces within the office. ESG credentials, too, have become critical factors in selection for occupiers. The appeal of these best-in-class offices can be seen looking at the impact of ratings like BREAMM and similar ratings on vacancy and take-up. The evidence is clear: better buildings lease faster and achieve higher rents compared to office buildings with limited amenities and poorer ESG credentials.

So, what does this mean for the investor? While the old “location, location, location “adage still has merit, investors and occupiers place increasing focus on the bones of a building. Diligence has increasingly focussed in ESG credentials, in-building utility consumption, carbon footprint and staff wellbeing and amenity space. These factors require greater scrutiny on capital expenditure and upgrade requirements – or increasingly – the cost of a total overhaul during an investment hold period. 

These upgrades can be costly and few locations in the UK offer a substantial enough rental level and/or a potential rental “green premium” to justify the required costs to meet modern investor and occupational requirements; costs which are often glibly underestimated by those simply interested in closing a transaction or valuing an income stream. Investors are now realising there is a real risk of “stranded” assets giving rise to significant management challenges and investment losses. However, the proactive investor who actively manages its office investments and maintains healthy tenant dialogue will find a way forward. 

At Catella APAM we are working collaboratively with Santander to design, procure and deliver a bespoke turnkey solution for their new Birmingham office. Our in-house capabilities to create fully fitted solutions that meet current and future occupational requirements were critical to achieving this result. Ultimately, the success of this endeavour rested on our proactive, integrated team of property, asset and investment management professionals working hand in hand with our in-house development team to deliver the right result for our tenants and investors from the outset. 

1 Colmore Row interior

1 Colmore Row Birmingham – Example Fit-Out

The traditional office will continue to evolve; 30 years ago, cycle storage, yoga mats and “break-out” space were unheard of. Just because occupiers now demand a different experience for employees, doesn’t mean that demand for a collaborative physical working environment doesn’t exist as some commentators suggest. The demise of the office has been greatly exaggerated; caveat emptor.

Article Written by Patrick Anderson, Head of Special Situations at Catella APAM 

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