The implications of this black swan event for the office sector are slowly unfolding; businesses shut down due to social distancing rules, revenues halted and a reduction in headcount. Depending on the length of the pandemic, these factors will present far-reaching challenges for the office sector.
We are in this together
Most pressingly, is business survival. Measures introduced by the Chancellor, to help businesses struggling with cash flow have overall been welcomed; £330bn of business loans and guarantees, a three-month ban on evicting commercial tenants and recently announced help for medium sized businesses. However, reports have suggested some measures are not being filtered down to businesses asking for help. As these problems are ironed out, some tenants are seeking assistance from landlords. Preserving businesses is in the best interests of property owners so mutual agreements in the form of rent holidays and re-gears are being explored. However, lenders also have a part to play and must support property owners with flexibility surrounding their loan obligations.
Smaller coworking operators face uncertainty
Landlords with large corporates tenants on long leases will be cautiously hopeful they can weather this storm however, the short and flexible nature of the coworking model, home to freelancers and SMEs are nervous. A recent global survey conducted by Coworker, found that 72% of 14,000 coworking spaces reported a significant drop in the number of people working from their offices since the outbreak. Such is the worry, flexible workspace operators have written to the Chancellor asking that the business rates relief offered to high street companies be extended to include coworking operators. However, it is important to note, the coworking model has matured in recent years, attracting larger corporate tenants on longer leases. This will be the saving grace for many operators in the sector. Once the pandemic is over, relief for those operators that remain may come in the form of occupiers displaced by property moves that have been delayed or postponed, seeking short-term space.
Traditional leases not immune
Whilst the focus has been on coworking, the traditional leasing market will not be immune in the short-term. We expect demand levels to slow considerably over Q2 and Q3, as occupiers adopt a wait and see approach, particularly occupiers with smaller requirements. There is significant uncertainty with deals on buildings under construction as projects face delays due to staff shortages and supply chain disruption. Similarly, space that requires vacating and new fit out will also face delays. These situations will also require negotiations between landlord and tenant, with delayed start dates or delayed rent commencement dates likely. Positively, however early indications of Q1 2020 data suggest leasing numbers have been relatively robust, albeit, slightly down on their long term quarterly averages. It is worth noting that the major UK office markets are not overly reliant on anyone sector to drive demand and therefore will be shielded from any sector specific COVID-19 related fall out. Furthermore, once the crisis is over, occupiers will still have to make decisions, many of whom will be driven by upcoming lease expiries. Indeed, we are still witnessing viewings, virtually, via our website which saw a 422% increase in March.
Office markets well placed to weather disruption
On the supply side, a modest rise in vacancy is expected through tenant return space however, the majority of large UK office markets are currently characterised by below average levels of supply. This coupled with a restricted development pipeline, only to exacerbated further by a delay to development completions, should minimise any significant falls in prime rents. Instead, to incentivise occupiers, we are likely to see rent frees move out.
