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13 May2020

An Occupier's Dilemma In Changing Market Conditions -- A Farebrother View

The changing needs of the office of the future have been debated for many decades so it seems strange to raise this to the top of the agenda after less than two months in lockdown. It is of course right to keep occupancy requirements under constant review, especially given technological advances over the last 10 years. However, any new thoughts of dramatic space and financial savings may be premature at this time.

At Farebrother we firmly believe that an occupier’s lease should be seen as an asset to the business and not a liability. It should be more than functional and should add to the business profit in some way. Although the workplace will move from home lockdown to a gradual ”return to office” phase there are now many new considerations to take into account. Social distancing will remain in place for some time but the imposed trial of home-working is not for everyone…

In a recent webinar, Hannah Nardini of WKSpace (www.wkspace.co.uk) summarised that weekly research, gathered from thousands of UK workers, has highlighted a clear split between those enjoying the current experience or actually hating every minute of it. Age (not as you might expect) and the home office set up were common barriers to acceptance of the new regime. The research found that the “Baby Boomers“ and ”Generation Z” age groups are actually enjoying the experience. Those from other generations, living in flats with no outside space or perhaps with young children or animals have been challenged by the new norm. Working from the kitchen or dining table, usually with unsuitable seating, has made the experience all the more uncomfortable…

Property occupancy has always been hugely individual, especially in the SME world; layouts differ hugely and this is set to continue. The home working trial must continue for the results and subsequent changes to stand the test of time. Business owners will need to fully engage with their employees as to what works best for them as well as for the business. Only after an “evidence backed” process can an occupier be sure of the long term success of this new way of working, reaping both the financial benefits of a reduced office footprint and hopefully happy colleagues.

We expect to see the current historically low vacancy rates rise over the coming months. Landlords will work much harder to retain tenants’ valuable rental income but sadly  we will see tenant insolvencies. The serviced office/co-working sector is already suffering a significant drop in revenue; a further challenge will develop as more office supply becomes available on traditional (and probably  much cheaper) lease terms.

In a new uncertain world, one thing is a given. Landlords with good quality buildings in prime locations will do well and continue to attract tenants. Poorer specified offices in secondary or tertiary locations are likely to see rent reductions, longer voids and additional tenant incentives to secure lettings. In both cases there is a strong possibility that the banks will be more reluctant to provide loans for occupiers to move, preferring to see any financial investment going into the business rather than property. Landlords will be able to attract new tenants by offering to provide capital payment incentives instead of rent free or if they fund “turnkey” fitted space ready for occupation. Not all landlords will be able or perhaps want to do this.

Ann Ibrahim, Farebrother’s Head of Research confirms that the statistics from our Q1 2020 research demonstrated a healthy market place up to the 25th March, two days past the imposed lockdown. We now expect to see reduced demand coupled with additional office supply. This is likely to bring about a more balanced marketplace between a landlord and a tenant.

Beyond that we will have to wait and see how tenants respond to the gradual return to the workplace. Many will have been hit hard by recent events and their priority will be to be shore up their finances whilst still working within health and travel restrictions. An office move may remain a long way down the list of business priorities.

For more information, contact Alistair Subba Row, Head of Occupier Services at Farebrother/CORFAC International.

 

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Locally Owned. Globally Connected

CORFAC International is comprised of privately held entrepreneurial firms with expertise in office, industrial and retail brokerage, tenant and landlord representation, investment sales, multifamily, self-storage, acquisitions and dispositions, property management and corporate services. Founded in 1989, CORFAC has 49 offices in the U.S., 5 in Canada and 18 in international markets, including Australia, France, Germany, Ireland, Italy, Japan, Malaysia, Mexico, Netherlands, Romania, Russia, Singapore, South Korea, Switzerland, Thailand, United Arab Emirates and the United Kingdom. CORFAC offices annually complete more than 10,000 lease and sales transactions totaling over 620 million square feet of space valued in excess of $8.2 billion.