Real estate impacts in considering the “new world”
A pandemic, by definition affects everyone at a personal, societal and business level. It has already presented significant challenges to life, our work-life balance and the way in which we conduct both ourselves and our business activity. No one and no business sector are exempt
As our understanding of how the virus propagates and how we can mitigate the risks to our health increases, we can start to develop medium and longer term strategies for life and business that go beyond the interim and temporary measures that have been taken to start to get the world economy moving again
In terms of real estate, the medium and long term changes to the ways in which we design, use and maintain buildings will, also have consequences for the costs of construction, maintenance, acquisition and disposal and, moreover, for the underlying asset values as rental and service charge arrangements reflect changing requirements
Office Sector
In inner London, there is about 227 million square feet (21.1 million square metres) of office space with a further 15 million square feet (0.435 million square metres) of new and refurbished space in the development pipeline to 2022
Businesses will need to consider the impact that operational changes including home working will have, on their premises requirement as well as policies, practices, information and device security, staff management and health, safety and welfare matters
Across the UK, average occupation densities for both public and private sector office accommodation was about 1 person per 10 square metres. In the short-term occupation density may reduce to facilitate social distancing and teams will, possibly, rotate in and out of the office alternating home working with office attendance but overall footprints may be similar to now or even increase slightly.
According to the Office for National Statistics 49.2% of employed adults were working from home in April and a report by “Instant Offices” suggests that 60% of office workers were home working at the peak of lockdown, whilst Theta Financial Reporting note that 57% of Londoners do not want to go back to normal commuting and working
In the last few days, Investment Managers’ Schroders have said that they will be largely allowing staff to work from home in the future with CEO Peter Harrison opining:
The contract between society and business has changed forever. The office will become a convening place where you get teams together, but the work will be done in people’s homes”
Dunkley, E., “City giant tells staff they can work from home for ever”. The Sunday Times, London 16 August 2020
and Jes Staley, CEO of Barclays suggesting the big office block could be a
thing of the past”
Hosking, P., “Should there be red faces at Schroders over their swanky green offices?”. The Times, London, 18 August 2020
Price Waterhouse Coopers have also reported that they expect the majority of their 22,000 UK workforce to work from home at least part-time even after Covid-19 is past. Chairman Kevin Ellis is quoted as saying:
There’s no question that lockdown has done away with presenteeism. It has shown many businesses that their people can be productive, engaged and happy working from home”
Hosking, P., op.cit.
Conversely, in the ‘States, Amazon has announced it is opening 900,000 square feet of new office space in six cities
In the future, it seems, that “office work” may become a blended activity that’s location agnostic and, as organisations normalise a mix of office and remote working and accrue the flexibility/productivity benefits thus provided; office occupation densities may revert towards current levels and, ultimately below them. For larger organisations there may even be a move to a hub and satellite model where a city centre corporate headquarters is supported by regional satellite premises serving local clients and supporting regional or sub-regional home workers
Residential Sector
Rightmove in their housing market report for July 2020 record that it was the busiest month for a decade with £37 billion in sales with agreed transactions 48% higher than in July 2019 and that this momentum is continuing. It would seem that this surge may be driven by pent up demand as deals ‘stalled’ during lockdown proceed to completion and the Chancellor’s cut in Stamp duty
In my view, there will be a weakening of the market as Furlough and other fiscal support measures are unwound and the Stamp Duty Holiday ends
Longer term (and if the predicted increase in home working becomes the “norm”), the residential market will see significant changes, I suggest, in the way in which homes are configured. Home workers will want to find more permanent solutions to enable them to work productively and will tire of “camping out” at the dining table, in the bedroom or sharing a study with children doing schoolwork. Demand for residential property that can accommodate (or be re-configured) to provide dedicated home-working space for several family members will increase as will a desire for domestic extensions or garden office rooms
Unfortunately, the UK does not compile reliable data on the size of new homes being completed. As land prices have risen and the housing shortage became more severe, houses have become smaller, especially as the lower end of the market whilst London and other cities have adopted their own minimum space standards. An RIBA Report “Space standards for homes” (7) noted that its own 2011 research indicated that the eight largest UK housebuilders were offering family dwellings that were, on average, 8 square metres smaller than the minimum standard for London – equivalent to the size of a single bedroom. It was that 2011 research that gave rise to the Department for Communities and Local Government publishing “Technical housing standards – nationally described space standard” in March 2015
It is not clear, as yet, if developers are complying with these new standards, which in any event are not mandatory until Local Authorities choose to introduce them via the planning system and, even then, the standard is open to challenge by developers on the grounds of “site viability”, but I suspect not. Even though there was a four year period (2011 to 2015) in which the standard was developed; RIBA data collected in August 2015 across 100 development sites involving 10 of the UK’s large housebuilders, showed that outside London the average 3 bedroom home was 4 square metres smaller than the standard – the size of a bathroom
It would seem that a necessary direction of travel is for space standards to be mandated both in the legislation arising from the Government’s White Paper “Planning for the Future” as well as the awaited revisions to the Building Regulations. Moreover, covenants in leases and freeholds that constrain or prohibit “business use” in residential premises will need to be dealt with as will utility supply contracts for residential premises that exclude business use (and, in particular here, I’m thinking of telephone, broadband and similar connectivity upon which business activity at home will depend)
… and Finally
As Messrs Thomas Triomphe (executive VP of Sanofi) and Roger Connor (president of GSK) observed recently, the search for a successful Coronavirus vaccine is, “not a sprint, it’s a marathon”. There are no guarantees that a vaccine will be available anytime soon (although, clearly we all hope that one will). The search for an AIDS vaccine has been on-going since 1984 (at which time, it was predicted by the US Secretary of Health and Human Services, Margaret Heckler that a vaccine would be ready for trial within two years) and that search continues
Maybe now we should also give some consideration to the strategies we might adopt for the medium term if a vaccine is not forthcoming as soon as we all might wish?
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