Pandemic risk poses major questions of commercial property market

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Social distancing rules could render crowded lifts a thing of the past
Photo: Shutterstock

Property experts have predicted that demand for office space in skyscrapers in London’s financial district is set to fall significantly despite the loosening of the coronavirus lockdown. And new patterns in office demand are emerging as companies look for self-contained buildings.

Business districts in cities in the UK could experience major changes in demand as physical distancing rules curtail the use of lifts. Working on upper floors in buildings may become unviable, many consider, given distancing guidelines affecting the reopening of buildings.

On Tuesday, City minister John Glen said banks in the City would need less office space after Covid-19.

At an online event held by the New Financial thinktank, Glen said: “Some of the banks will reduce their physical footprint in terms of their square footage in the City.”

Retail magnate and entrepreneur Theo Paphitis tonight on BBC Question Time echoed that view. He told the programme: “I can’t see offices with that many people ever again. First thing I’ll be doing is cutting down the number of people come into the office. We’ll need less space.”

Paphitis said that lockdown had seen technology suddenly accelerate forward five years. “We’ll never be the same again.”

Quoted by the Guardian on Tuesday, property consultant Tony Lorenz, of real estate specialist Lorenz Consultancy, said the trends he was seeing were the most radical shift he had seen in 50 years working in the commercial property sector.

The consultancy’s work with banks and financial bodies had led him to conclude that even allowing for physical distancing measures, such as the separation of desks, firms now had 20% more office space than they required.

He later told Personnel Today: “We’re working just as efficiently as ever although we’re all working at home. Do management staff really need to come into offices paying £90 per square foot? With service charges they’re paying paying £16,000 a year just for the space of each person. Then you have to add social distancing to that.

“There’s a fear factor we’ve never had before… a lot of people have lost a fortune. When you look at the investment market investors will not be confident that tenants will survive. Even the strongest tenants are struggling to pay rents. Yields are going to go out and commercial prices will fall in the commercial property market. It is Armageddon.”

Companies were not just planning to pay less and reduce their office size, but were looking to move to buildings where they could better control the environment and ensure the wellbeing of their workforce. “I’m anticipating at least a 20%-30% fall in rents for offices,” Lorenz said. “We’re already expecting the agency market to become very busy as demand grows for self-contained buildings with their own front doors.”

As reported by the BBC and the Guardian, in April the chief executive of Barclays, Jes Staley, foresaw the trend away from skyscrapers: “I think the notion of putting 7,000 people in a building may be a thing of the past, and we will find ways to operate with more distancing over a much longer period of time,” he said.

“I can’t see offices with that many people ever again. First thing I’ll be doing is cutting down the number of people come into the office. We’ll need less space” – Theo Paphitis, entrepreneur

One possibility, he mooted, was to use retail branches as network hubs for investment bankers and call centre workers so that they could avoid long commutes and busy central offices.

About 70,000 of Barclays’ staff worldwide are working from home due to coronavirus lockdown measures.

Meanwhile, research by credit rating agency Moody’s Investor Service suggests that environmental, social and governance (ESG) factors were an increasing focus for investors, who were watching to see whether companies were properly supporting employees and clients as the coronavirus pandemic hit economies globally.

Investors were increasingly asking about whether companies had helped employees with technology at home, whether they would continue a flexible work policy and whether they had been lenient with creditors.

“We are a long-term investor, so we won’t be selling shares of companies immediately even if they don’t meet our ESG expectations,” one senior executive at an investment firm said. “We will continue having dialogue with them and monitor how they will change over the next five to six years.”