On 21 March 2024, McGuireWoods London partner Callum Hassall moderated the third session of Bisnow’s UK Office Series: The Renaissance event, which focused on London’s office leasing landscape.
The event attracted 200 attendees from across the full spectrum of investors, developers, landlords and tenants involved in the London office market. Callum’s session drew an audience of approximately 80 delegates.
Callum was joined on the panel by Adam Blazeby, Morgan Stanley’s co-head of Europe, Middle East and Africa Real Estate Services; VTS’s head of UK research, Kuldeep Gadhary; senior vice president and co-head of Trammell Crow Company, Toby Pentecost; and Dan Westley, the leasing director at event host Battersea Power Station.
Here are some key takeaways from the session:
Navigating changing market conditions is uncertain but not downbeat.
Predicting how the leasing and subleasing markets will evolve over the next few years will be challenging, not least because of higher interest rates and the current political turmoil, which is causing uncertainty. The result is that decisions around investment and development, as well as occupancy, are being kicked down the road. Despite this, the overall view of the market is upbeat and positive.
A return to the office is being pushed by occupiers.
Of late, there has been a shift in mentality when it comes to occupiers pushing for office attendance. A quick show of hands at the panel to indicate the percentage of employers that have mandated or are otherwise encouraging their employees to return to the office was surprising. Around 90% of attendees raised their hands, far more than the anticipated 50-60%. In spite of this, there is no doubt that the office must work harder than ever to compete with the perks of agile working. The preferred route for many occupiers is to encourage the workforce back to their desks rather than enforcing a minimum number of days in the office. In these circumstances, the office experience is vital.
The flight to quality is real.
From a data standpoint, VTS shared that in 2023, 78% of viewings were for Grade A space, which is up from a long-standing average of around 60%. It also revealed that while larger occupiers are tending to downsize their space requirements, which have reduced by an average 15% over the last three to four years, the space requirements of smaller occupants has remained flat.
There has been astonishing rental growth in certain pockets of the market, with some occupiers having to move fast and make compromises to secure space. What this means for the secondary office market remains to be seen, but there’s certainly cause for concern. At present, the increased emphasis on sustainability and energy performance means that a lot of capital is not ready to take the risk on Grade B buildings. To grapple with these concerns, the panel recognised that the secondary market will likely be required to evolve to reflect how people want to use real estate in 2024 and beyond.
It’s not the size, but what you can do with a property that matters.
Business needs and requirements change, and office space needs to be able to adapt in the same manner. This point was stressed by Morgan Stanley’s Adam Blazeby, who explained how he’d like to be able to chop and change how a building is used in line with the company’s changing requirements. In a similar vein, tenants also want flexibility around termination rights.
If tenants are paying more attention to how a space can be best utilised, reconfigured and ultimately, how they can be disposed of efficiently, then landlords also need to ensure that, within reason, they can provide for this or landlords risk losing out.
Offices are no longer a commodity.
In the recent past, offices were considered to be a commoditised product. That is no longer the case. Whereas surveyors tend to think about £-per-square-foot, tenants think about flexibility, resilience and amenities — factors that make up the profit and loss assessment. Rent is no longer at the top of the list. This is particularly the case with large scale occupiers that take a more holistic view.
There’s no one-size-fits-all solution when it comes to the modern office and it is not always possible for landlords and developers to predict tenant needs before a new office building is fully developed and open for business. Now more than ever, it’s important to get the amenities offer right, in the right location.
Communication is key.
Inevitably, shorter term leases make communication between landlords and tenants even more important. The panel underlined how an improved understanding of the other’s position, whether it be in relation to financial requirements or being able to efficiently report maintenance issues, will help to build a positive and long-term relationship. This is also where technology can enhance the user experience and gain an insight into what occupier’s want, what can be improved and what is required to ensure that they stay put for longer.