In-Office Workers Still Down 31% on Pre-Pandemic Levels – what does this mean for the commercial property market?
Since the summer, the government has been encouraging workers to return to the office, although at the time of writing this article it remains to be seen whether the Omicron variant will result in a change to this.
However, despite such Government encouragement, it appears that workers are not rushing back to the office. Recent data from Google shows that, as of 30 September, the number of UK workers working from physical offices is still down by 31% compared with before the COVID-19 pandemic. Cities have seen the greatest drop, with London seeing a 40% fall in physical office workers compared with pre-pandemic levels.
If office workers do not return to city centres, it is likely to have significant consequences for the commercial property market and commercial landlords. Any long-term changes in working patterns will inevitably impact demand for various types of commercial property, including office space and the city centre retail and hospitality businesses that have traditionally relied on office workers for much of their trade.
While this situation is likely to cause commercial landlords real anxiety, understanding what future demand for commercial space may look like can help to identify the potential opportunities should the current trend towards homeworking continue.
How have working patterns changed due to the COVID-19 pandemic?
When the first UK lockdown was introduced in March 2020, many people found themselves working remotely for the first time. While some people have continued to work fully remotely, many businesses and employers are now embracing hybrid working (where employees work some days in the office and some days from home).
It seems likely that hybrid working will be the “new normal”. Data from YouGov reveals that 79% of business decision makers and 70% of the general public think that workers will never return to offices at the same rates as before the pandemic.
Data on workers’ commuting patterns reveals interesting statistics about the days people seem to prefer working in the office. For example, in the first week of October, the number of commuters in the City of London was 35% higher on the Thursday than on the Monday.
Exactly how working patterns will be affected in the long-run remains to be seen. As COVID-19 rates are still relatively high, it seems safe to assume that some workers are staying away from their offices for safety reasons. As we learn to live with COVID-19 and people become more confident in the effectiveness of vaccines and other safety measures, it should be clearer what the future will look like.
How is the rise in remote working and hybrid working affecting commercial landlords and investors?
Changes in working patterns are likely to present real challenges to commercial landlords and investors in the office, retail and hospitality sectors, on top of the issues the sector is already struggling with due to the impact of the pandemic.
Some of the most commonly reported and expected issues are:
- An increase in requests from businesses to surrender, sublet or assign their leases (to allow them to down-size or move out of their offices)
- Reduced demand for larger office spaces (due to many businesses no longer having their full teams in the office all at once)
- An increase in vacancy rates (where a tenant cannot be found) – this not only leaves a unit producing no income, but high vacancy rates can also decrease the value of surrounding units
- Big reductions in footfall for retail and hospitality businesses such as cafes and shops that rely on office workers
However, there are also opportunities for the commercial property sector if landlords, investors and businesses are able to adapt to changing demand, such as:
- Allowing tenants to sub-let or transfer their lease to a new tenant (known as ‘lease assignment’) to avoid empty premises
- Offering shorter lets and more flexible lease terms to attract tenants who may be wary of committing to a longer lease
- Sub-dividing offices to create smaller units that may be more attractive to businesses embracing hybrid working
- Transforming vacant offices into co-working spaces for those who are unable to, or prefer not to, work from home, but who do not have a traditional office to go to or want to avoid long commutes
- Leasing retail premises on a short term basis for pop-up businesses
- Converting empty and unprofitable office and retail space into residential use (which, in some cases, can be done under ‘permitted development rules’, meaning full planning permission is not required)
All of these options will need to be very carefully considered, including the potential legal and business risks, but they do show that there are still likely to be ways to achieve good returns from the commercial property sector for landlords, investors and businesses that are able to adapt to the changing needs of the market.
What will city centres look like in a post-COVID-19 world?
It is impossible to predict with 100% accuracy what the future will hold, but current trends can help us to identify where the opportunities are likely to be once COVID-19 is under control.
Based on the way things are moving, we would expect city centres of the near future to have fewer large offices, but potentially more smaller offices. However, it is likely the total amount of office space in city centres will decrease.
It also seems likely that retail vacancy rates will increase (as has been the trend for the last three years). This seems to be particularly an issue for shopping centres, many of which are now under threat. While pop-up shops and other types of flexible and novel retailers may go some way towards filling this gap, again, the total amount of retail space in city centres does seem likely to continue to decrease.
For restaurants, cafes and hospitality businesses that rely on office worker footfall, there are also likely to be significant changes. However, it is telling that Pret a Manger, which has closed dozens of locations during the pandemic, is now planning to open 200 new locations in the UK over the next two years, primarily targeting suburban and provincial areas. This suggests that, while there may be a reduction in city centre food and drink units, this could simply represent a shift to less urban locations, rather than a nationwide reduction.
Once of the biggest changes we expect to see in city centres in the coming years is a growth in residential space, with the government having announced new permitted development right in England to allow the conversation of commercial, business and service use property (Class E) to residential use (Class C3) without the need for planning permission. This will give landlords and investors the potentially very profitable option of converting unproductive commercial space into valuable homes.
Speak to our Commercial Property team for expert advice
Commercial landlords and investors may have faced some tough times and difficult decisions due to changes brought on by the COVID-19 pandemic, but there are always opportunities in the commercial property sector – especially if you have the right legal advice and support.
Whatever route you choose to take, the Commercial Property team at Longmores can help you to make the most of your opportunities and minimise any potential risks. With our expertise, you can be confident that your plans are truly future-proof.
To discuss any commercial property legal matter, please get in touch with our highly experienced team today.
Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.