How Has COVID-19 Affected Global Commercial Property?
It would be an understatement to say that COVID-19 has changed the office. Commentators use terms like ‘the new normal’ or ‘reimagining the workplace’ to describe where and how work takes place, now and into the future.
With stay at home advice and lockdowns in countries around the world, working from home became a way of life for millions of office workers. Most assumed that remote working would be a short-term solution, but, as the pandemic continued, views on the workplace began to change.
A number of major technology companies, for example, told their employees they were free to continue working from home. Other businesses have tried to implement a phased return to the office, while giving their employees the option to continue working from home.
Some firms in the financial services sector declared that working from home was ‘an aberration’ and expected all of their staff to return to the office full time.
Businesses that decide to bring employees back to the office face significant changes to space capacity and layout. Social distancing means that desks and other workstations must be spaced further apart, reducing overall capacity for numbers of employees. In some cases, this is balanced by absences where employees decide to continue working from home.
In businesses that now have a ‘split workforce’, space requirements change further. The emphasis is on collaboration spaces where office-based employees can work with their remote colleagues via video conference in ‘virtual meetings’. Formal meeting rooms, small ‘huddle rooms’ and informal meeting spaces are now an important part of the office landscape.
How has the working from home revolution affected the property sector?
The changes in working practice are also feeding into the residential property sector. Given that commuting may no longer be an important factor for home workers, property firms are reporting a drift from city centre homes to larger properties in outer areas where additional rooms provide space for a dedicated home office, rather than a laptop in the bedroom or on the kitchen table.
In the rental sector, an increasing number of build-to-let developers are offering properties with high-speed Internet connections and communal workspaces to attract people who want to work from home, but with a greater sense of belonging to a working community.
These trends are likely to further impact the commercial sector by reducing demand for traditional central office accommodation.
While these general trends apply to businesses in many different parts of the world, there are significant regional variations in the way COVID-19 has impacted the commercial property market. So, the remainder of this article looks at the impact of the pandemic and the opportunities for investors in London.
In London, changes in demand for development land have been a good indicator of the changing state of the commercial property market. At the beginning of 2020, demand and prices had been high driven by an earlier Conservative election victory and an imbalance between supply and demand.
Lockdowns saw a stalling in transactions with a nervousness in the market, but a feeling of relative confidence in a longer-term return to pre-Covid levels fuelled by a small number of major deals, such as the Canada Water site.
The pattern of office space requirements was more difficult to predict with residential trends highlighting a relative flight from the centre to areas offering larger work from home space and less reliance on the commute.
The transition to more flexible working arrangements is likely to be the dominant factor determining office space demand, while the collapse in ‘high street’ retailing and the growth of online business is triggering a repurposing of retail space.
Like many cities, Toronto and other major Canadian cities saw dramatic changes in working practices. At one stage during 2020, Canadian authorities calculated that almost 40 percent of the workforce was working from home.
The third quarter of 2020 reflected the changes with a 1 percent increase in Toronto office vacancies and around 1.6 million square feet of additional office space sublet. Despite that, average office rental costs remained consistent with pre-COVID levels.
There was better news for other types of commercial space. Industrial and logistics space occupation levels and rental rates remained at higher levels as work from home was not a practical option for many employees. Any changes in demand for space were driven by a fall in sales rather than different working practices. A massive rise in demand for home delivery also influenced space requirements for logistics businesses.
With the rise of remote working across the globe, it is no surprise that Hong Kong is one of many cities that is experiencing a fall in demand for commercial property. Since the first national lockdown, demand for Grade A office space across the city has been in a downward spiral, with the vacancy rate for Q4 2020 reaching 7.3% – the highest figure since 2004.
Coronavirus has challenged even the healthiest economies across the world, and was responsible for onsetting Hong Kong’s most severe recession to date. With this impacting every inch of the city, many businesses were forced to choose between downsizing their office spaces or risking the company’s financial security.
Although many experts are anticipating an economic rebound in Hong Kong later this year, the volatility of this commercial property is encouraging Chinese investors to look elsewhere. With the UK forecasting a strong economic recovery, and the past performance of the property industry, prime London office space is becoming an increasingly popular choice.
Increasingly across the South East of England – commonly referred to as the London Commuter Belt – we’re seeing an accelerated shift away from the office. While people are leaving an increasingly expensive London market in search of more affordable property prices, many are continuing to work in the capital.
Before the global pandemic, this meant a heavy reliance on exceptional transport links and access to London. While this will still be the case for some businesses, increasingly we’re seeing more flexibility towards remote working, which is increasing the need for progressive mixed-use developments across the region.
In Slough, for example, it’s expected that the new Queensmere regeneration will include co-working office space amongst the retail and leisure units, while new development in Bracknell – The Grand Exchange – has a Wi-Fi lounge and co-working area integrated into the development. This is likely to become a new standard for residential developments, meeting the needs of changing tenant priorities.
In Los Angeles, the transformation of the office follows a familiar pattern – less space per employee to comply with social distancing guidelines. Uncertainty about the future meant that many tenants were only willing to agree short-term contracts or take a rental pause, but with few willing to make long-term commitments.
The type of space is changing demand. While demand for high-density, open-plan office space saw high pre-pandemic levels, social distancing guidance is shifting demand towards campus-type buildings to support hybrid working models with increasing levels of collaboration space
There was a similar pattern to Toronto in the logistics and industrial sector with occupation levels holding up, while retail space was badly hit.
United Arab Emirates
Unsurprisingly, the global working-from-home trend has stretched to the UAE. With Coronavirus having changed working culture for the foreseeable future, it’s looking likely that office spaces will have to adapt to new flexible working demands, and will provide more ‘mixed-use’ facilities.
National lockdowns and strict ‘stay at home’ instructions have forced many workers to live, work and sleep in a single space over the past 12 months, which going forward, has inevitably changed employee demands. As a result, Socialisation and collaborative working will be key when workers finally return to their offices.
With these requirements in mind, it is expected that a further 350,000 sq.m of space will enter the market over the next two years. However, it’s likely that employee demands will encourage a new level of amenities to emerge, many of which are absent in the current market.
The opinions expressed by the guest writer above and those providing comments are theirs alone, and do not necessarily reflect the opinions of SevenCapital or any employee thereof. SevenCapital is not responsible for the accuracy of any of the information supplied by the guest writer.