UK businesses think big about smaller office spaces

When lockdown started on March 23 last year, James Tew was reviewing the lease of his Manchester office. Within weeks he had decided not to renew, with his staff of 55 software developers content to work from home.

“The rent, the free fruit and the coffee machine saved us about £280,000 a year. We are now investing that in people. We are recruiting,” said the chief executive of iVendi, which supplies the car sales and finance industry.

iVendi is not alone. The pandemic has caused companies of all sizes to rethink their need for offices, leading to dumping of stock on to the market and persuading developers to hold back from new construction.

As long as social distancing is enforced, “no one will know” how offices are likely to be used in future, said Mat Oakley, head of European commercial property research at real estate company Savills. 

Many occupiers are subletting space at a discount. Nowhere is that more true than in London, where there is 6m square feet of so-called grey space on the sublet market, twice the pre-pandemic level, according to Savills. 

That has created a two-tier market: employers want new, high-specification offices to tempt staff away from their homes, but the glut of supply is mostly smaller, second-hand space on short leases. 

“The 6m sq ft of sublet space is precisely not what [companies] want to occupy in London,” said Oakley. “That means much of that simply won’t be let.”

Once an economic recovery begins, companies that had hoped to sublet will quietly withdraw the space from the market and reoccupy it, predicts Oakley.

But with working patterns likely to be permanently upended by the pandemic, some space will be surplus to requirements and offices could become what architect Lord Norman Foster has called “the residential towers of the future”.

HSBC recently announced it would reduce its space by 40 per cent globally, but retain its Canary Wharf headquarters.

Across the UK, three-quarters of midsized businesses have started, or are considering, reducing the volume of their office space, according to a survey published in January by RSM, an accountancy firm. Of the 405 executives surveyed, 80 per cent said they would let some staff work from home full time.

Simon Hart, lead international partner of RSM, said the average occupancy rate across its 35 UK offices was 60 per cent before the pandemic. “We do not have any plans to shut any offices but we might downsize by 40 per cent and have more collaborative space. The days of traditional offices with ranks of desks are over,” Hart said. 

With staff surveys showing demand for at least some homeworking once the pandemic subsides, larger companies are also reconsidering their office needs.

“There was an awful lot of resistance to homeworking before this crisis in banking and finance. Overnight, our clients had to go from having an immobile workforce to a completely mobile one. It will be a huge shock for them, because you can’t put the genie back in the bottle,” said Oakley.

Builders are already responding to falling demand. The amount of office space under construction in Manchester, Birmingham, Leeds and Belfast dropped in 2020, according to the annual crane survey by Deloitte, the consultancy firm.

Total office construction fell from 4.32m sq ft to 3.61m sq ft year on year. Developers started 14 schemes, including refurbishments, the same as the year before.

Simon Bedford, regional head at Deloitte Real Estate, said tenants were concentrating on places that were attractive for staff, rather than simply functional. “The new start office space under construction is being marketed as amenity-rich, with wellbeing and community high on priorities.”

Oakley said it would be another year before occupiers knew how working behaviour had changed but the sense was that most staff wanted to be in during the middle of the week, meaning demand for desks would not necessarily fall. “If you are the head of corporate real estate at Goldman Sachs, you have to plan for people being in on those days, so you cannot downsize,” he said.

Mike Hawkins, head of UK regional offices at Colliers, a consultancy, said many companies had been “caught napping” with a “bloated” property portfolio. “A lot of office space will be discarded,” he said.

However, concerns about climate change and staff wellbeing are also driving demand for modern, carbon-neutral buildings rich in amenities, according to Hawkins. “There has been no reduction in rents for the best spaces,” he said.

The need for younger workers to collaborate and learn from others will ensure most employers maintain a physical site, with many targeting regional cities with big universities, Hawkins added.

Even iVendi is retaining a head office in Colwyn Bay, north Wales, for its finance and marketing teams. Some staff are relocating there from Manchester because houses are cheaper. Tew envisages reopening a small office in Manchester for client meetings and team get-togethers after the pandemic. 

“The consensus is that people miss the camaraderie, but they prefer working from home,” he said.