Not the title of the latest Star Wars film, rather the green shoots of what is being dubbed the ‘new normal.’
In a recent blog post we wondered whether this new normal has heralded the end of the office as we know it and we concluded with the fact that the applecart has been upset to such an extent that ‘property occupancy strategies will be reviewed, portfolios will be assessed and the risk, costs and benefits of occupying such prime, expensive space will be balanced.’
Barclays CEO Jez Staley, whose company occupies a 33-storey tower in Canary Wharf was quoted as saying ‘the notion of putting 7,000 people in a building may be a thing of the past.’
Mondelez Chairman and CEO Dirk van der Put wonders if ‘maybe we don’t need all the offices we have around the world’ and Sergio Ermotti, outgoing CEO of investment bank UBS is also considering a move out of prime city-centre space.
Goldman Sachs left it up to its staff to decide whether they want to go back to the office but it’s thought that only 600 of the 6,000-strong workforce have taken them up on their offer.
According to City of London police commissioner Ian Dyson, the 30 biggest employers in the City intend to bring back between 20% and 40% of staff. The rest will continue to work remotely.
All of which raises a number of important questions as tenants and occupiers undertake what is effectively an enforced review of their office strategies –
• Do we need all the space we currently have?
• Moving forward, can we reduce our property outgoings?
• As a business, can we offer flexible working conditions? If we can, are we?
• What is going to be available in the market in the coming months?
• Has our current landlord been helpful in our hour of need?
• What are our staff saying? Do they want to come back to the office they left or will we have to dramatically change elements such as better air quality and communal circulation space?
One of the major issues is that there is no ‘one size fits all’ answer. Every business needing responses to these questions will have been affected in vastly different ways. Some will have suffered greatly, laying off staff, cutting salaries and in a worst-case scenario, going out of business. Some will have weathered the storm to a greater or lesser extent and some will have been unaffected, business as usual.
So, What Can Landlords and Tenants Do?
Regardless of the outcome of these questions, the ability to make accurate, long-term decisions has all of a sudden become incredibly hard so by way of sublet or assignment, tenants can take a proactive approach.
They can effectively test the waters by instructing a reputable agent with an in-depth knowledge of the central London office market and see if there’s interest from another party to either take over the remaining term of the lease or in certain cases where the lease permits, sublet part of the space.
Using the same analogy that for every minute a plane sits on the ground it costs the airline money, for every day an office sits empty, it costs the landlord money.
Sarah O’Beirne writing in Facilities Management Journal back in June says that ‘business have realised the value of flexibility post Covid-19 according to a report by commercial property specialists Instant Offices.’
She writes, ‘With 60% of the UK workforce working from home during peak-lockdown and millions of businesses struggling to cover overheads, offices across the country have been left standing empty and rental negotiations have stalled.’
Across the UK there is a vacancy rate of 4.5%, or a little under 58 million sq. ft. of empty commercial space – around 50 times the square footage of the O2 Arena.
How To Manage Ghost Space
Having BDGSparkesPorter acting for you as your agent advising the acquiring tenant, our client, we are able to get to the detail of the outgoing occupiers situation and rule out the ghost space from any shortlist of suitable options.
Effectively we would identify what space is available and during our search understand the timing of the outgoing tenant’s requirement. Are they in the process of moving? Have they moved or have they not started the process? If the latter, the deal could mean the space is not available for six months or longer. When we refer to ghost space here we refer to the fact that although the space is on the market, it doesn’t in fact hit the brief of our clients’ specific requirements.
However, it is worth noting that potentially available space does come with a health warning in that the outgoing tenant may not have any meaningful plans to vacate, they therefore wouldn’t have spent the time to evaluate alternative premises and the knock-on is that the rental chain will hold up any deals that may be able to be done.
The Benefits of the Rise of Ghost Space
When ghost space does manifest itself, there is another knock-on effect:
• Sub-market vacancy rates increase
• There is more choice for tenants
• Deal terms become more competitive
• Rent-free periods increase and rents start to come down
In turn, this leads to benefits for tenants and landlords.
As we mentioned, or tenants there is increased choice leading to the availability of more competitive and flexible deal terms (known as a ‘tenant favourable market’).
For landlords, there is an improvement of the marketing of space to compete with the increase in available space; they can return space to their portfolio if upgrades are needed and a surrender of the lease can be considered or a management agreement put in place. This gives both parties more flexibility to break the agreement/lease when another party is found to take the space.
For more information and for all your central London property requirements, please contact us on 020 7629 1088 or email info@bdgsp.co.uk.