FALSE: Remote working is here to stay but that doesn't mean the end of offices. The impact of the measures taken to curtail the spread of COVID-19 have dramatically changed the working landscape pushing the office sector to undergo yet another period of structural changes.
The flexibility working from home has offered means more businesses that were initially reluctant are likely to be adopt working from home practices in their long-term strategies, to cut costs and also improve staff morale and productivity. Thus, businesses continue to assess whether to commit to new offices putting decisions on hold until economic stability is restored. As a result, occupier demand for London office space in 2020 fell significantly by 52% compared to levels in 2019. Despite a slowdown in leasing activity, large corporates have still committed to spaces in Central London. Latham & Watkins recently signed a 245,000 sq ft deal in January this year.
Furthermore, the regional office market has showed signs of resilience with take-up reaching 2.9m sq ft which is down 39% on 2019. A surge of late deals completed in the final quarter of 2020 including BT signing a 176,000 sq ft deal in Manchester boosting take-up figures. Overall, this represents a respectable performance in the regions given the challenges presented by the COVID-19 pandemic.
Whilst the re-occupancy of offices will be gradual, largely dependent on the easing of restrictions, high quality physical environments still hold a great importance in building a culture, promoting collaboration and establishing an identity for a company. Face-to-face interactions are more important than ever. This may vary, and will depend on the nature of a company. Tech giants such as Facebook announced an extension to their working from home policy until July 2021. Whilst Banking and Finance firms are taking a different approach, Goldman Sachs and JP Morgan expect all workers to return to the office during the Summer. But all in all, a larger proportion of workers have a renewed sense of appreciation of the office environment.
FALSE: Office rents were projected to fall as a result of a combination of rising vacancy in the form of tenant return space and weaker demand since the first lockdown in mid March. The limited take-up and disruption caused by COVID-19 has given occupiers more leeway to negotiate and secure competitive rents. There were even concerns that this will repeat the pattern of the rental decline during the financial crisis.
This was evident in the third quarter of 2020, as prime rents declined across the majority of submarkets in Central London. The City in particular witnessed a fall in prime rents standing at £70.00/sq ft in Q3 2020, down from £72.50/sq ft in Q2 2020. Despite this, prime rents have remained broadly static as the market showed no annual decline on 2019.
In the UK regions the situation differs, as there is currently an undersupply of grade A office space. Rents in the regional office markets are less exposed to downward pressure resulting from the current economic climate. In Birmingham there was rental growth during H1 2020, prime rents increased by 7% from £34.50/sq ft to £37.00/sq ft. Similarly, in Bristol prime rents increased by 7% from £35.00/sq ft to £37.50/sq ft.
It is likely rent free periods will begin to rise further as landlords compete to secure lettings with less footloose tenants by proposing more generous incentives. When the COVID-19 lockdown has been fully lifted, the number of leasing transactions in the UK office market should increase to the extent that new rent and rent free period benchmark trends will begin to appear.
Read more about our changing relationship with the physical workplace and the Next Chapter for Offices.