@DeVonoCresa shares insights when it comes to #Coronavirus office market disruption
The United Kingdom finds itself in unchartered territory – both socially and economically.
Social distancing and economic support measures taken by governments globally to stem the spread of COVID-19 are unparalleled. The legacy impact of the crisis will leave an indelible mark on us all. It is difficult to predict how and when some semblance of normality will return.
In the meantime, businesses are attempting to operate normally, albeit remotely and with reduced staffing, with many businesses up and down the country furloughing staff under the Government’s Coronavirus Job Retention Scheme.
It is also true to say that our relationship with, and perception of the physical office space has changed in recent weeks, potentially influencing future real estate decisions materially. Shaun Dawson, Head of Insights at DeVono Cresa, looks at what, in the short term, will be the appetite for office space when ‘normality’ resumes.
A property researcher’s first port of call is to seek out comparisons. The financial crisis in 2008 is our most recent reference point for economic upheaval on a global scale. The demand for office space declined as the crisis took hold. Leasing activity in the UK’s largest office market of central London fell by 21% in 2009.
This followed a 19% reduction in space let in 2008. The economic shock quite clearly had an impact on office space demand. However, businesses did adapt and when positive economic indicators returned, so did the appetite for new workspace. Leasing activity rebounded in 2010 wholeheartedly.
Another recent reference point is the 2016 EU Brexit referendum. The UK’s decision to leave the European Union caused political and economic shockwaves.
Stock and currency markets reacted quickly and tumbled. Uncertainty set in, causing leasing of office space across London to slow down. However, this was short-lived, with office demand picking up in the final quarter of 2016, cushioning the impact of the summer slowdown.
Despite the end of year rally, total office space leased in 2016 across London fell by 24% on the previous year. This was largely due to uncertainty – ebbing and flowing over three years – as a result of the uncertain outcome of Brexit and whether we would indeed leave. However, businesses could not and can not defer real estate decisions forever, or until there was absolute clarity on the outcome of Brexit, causing demand in 2018-19 to peak.
Uncertainty stemming from the COVID-19 pandemic, however, is different. Today’s crisis is not just economic or political; it is a medical and social emergency. There is no recent historical precedent to compare to. Even recent virus scares such as SARS, MERS, Swine Flu or Ebola did not lead to measures of the scale being taken today. When the virus does dissipate, businesses will quickly want to resume to ‘normality,’ as seen in previous crises. Definitive timing of when this will happen is of course as yet unknown.
The duration of ‘lockdown’ will be one of the key determining factors when we consider the impact that this virus will have on businesses and the wider economy.
The UK will likely enter a recession as a result of the disruption. The Office for Budget Responsibility (OBR) has released a stark scenario analysis suggesting that the UK could lose up to 35% of its GDP in the second quarter of this year, with unemployment rising by 2 million people to 10% of the working population.
Other western economies are bracing themselves for similar scenarios, with the International Monetary Fund already dubbing it the ‘Great Lockdown Depression’, rivalling that of the Great Depression of the 1920s. In line with a number of economists however, the OBR predicts that the downturn is likely to be for a shorter period than expected. Business and consumer eagerness to move on could see a release of pent-up spending and investment, providing a boost to the economy and putting it on a fast-track recovery.
Following several weeks of social distancing measures, the office market had been effectively put on ice. Given that the lockdown occurred at the end of Q1, data on market fundamentals do not reveal a huge impact as yet.
DeVono Cresa research shows that office availability across the UK’s largest market of central London increased by a marginal 2% at the end of March 2020, compared with the level at the beginning of the year. Rental prices have remained at similar levels.
Dawson adds: “For the moment, it is unlikely that the majority of landlords will consider reduced rents, at least outside of the well-documented deferrals and abatements being discussed whilst we remain under lockdown.
“They are more likely to enter into conversations about improved incentive packages or even deferring lease start dates until the time is right.
“However, we do expect that Q2 will be a different picture, with a dip in demand as businesses adjust to current working practices and the full force of lockdown is displayed in market data.”
Yet office space demand is likely to resume and rebound. Between June 2020 and December 2021, there are approximately 1,500 tenants in over 10 million sq ft of office space across central London with leases due to expire.