In March, the coronavirus outbreak led to a mass exodus from UK offices as the country went into lockdown. Sensationalist media headlines screaming “Is it really the death of the office?” soon became a regular occurrence, sparking concerns about the sector’s ability to survive. Recent research from Knight Frank, however, dismissed the idea as “naïve” and stated that “rumours of the death of the office have been greatly exaggerated”.
In this blog, our Commercial Property team take a look at how office landlords and tenants have handled lockdown, the challenges of re-occupancy, and what the future might look like.
How has the office sector coped?
For office occupiers, cash flow and liquidity immediately became a serious issue, leading businesses to approach their landlords for rent relief, alternative payment structures or rent deferrals. Estate agency Savills suggests that the majority of landlords are working with tenants to find pragmatic solutions that fit the needs of both parties.
Businesses without cash flow have also had access to financial support in the form of the Coronavirus Business Interruption Loan Scheme (CBILS) and the Coronavirus Job Protection Scheme (CJRS) to help them pay key expenses, e.g. rent. There has also been increased legal support for business tenants, with Section 82 of the Coronavirus Act imposing a moratorium on the forfeiture of commercial leases for non-payment of rent until at least 30 June 2020.
In the April edition of its COVID-19 European Office Markets series, UBS concluded that disruption to office occupiers generally had not been as serious as for other sectors. In fact, offices were one of the most resilient sectors in terms of rent collection. On the other hand, serviced office and co-working space providers faced very immediate impacts to their cash flows. Operators such as WeWork and IWG suffered severely, with IWG’s share price trading at 50% below its pre-coronavirus level in April. Both providers were forced to approach their landlords to negotiate rent relief.
Re-occupancy becomes the main goal
As lockdown eases, companies have turned their attention to how they can return to offices safely while respecting social distancing guidelines. The main task will be reconfiguring offices and purchasing PPE such as hand sanitisers, screens and floor tape to ensure workers’ safety. According to Knight Frank, this could result in a 50%-60% reduction in office capacity.
Moreover, contrary to the increasingly popular view that nobody will want to return to the office, a recent survey suggested that 90% of respondents believe an office is necessary for a company to operate successfully, at least in the short term. Meanwhile, Dan Bayley, Senior Director and Head of Tenant Representation/Occupier Solutions at BNP Paribas Real Estate, added: “many [people] live in small living accommodations not necessarily suitable for home working. Many will therefore welcome the return to the office, once it’s safe to return, as the office environment can offer greater opportunity for productivity and concentration.”
What next for UK offices?
Currently, evidence seems to suggest a relatively encouraging picture of the office market’s prospects. Particularly for offices in core locations and with strong leases, pricing remains virtually unchanged against pre-lockdown levels. In its June European Office Markets document, UBS concluded: “We take a relatively positive view on the future of offices – yes they will have to evolve and look different in a post-COVID world – but there will still ultimately be strong demand for the right product in the right location.”
Critical to the ongoing survival of both landlords and office occupiers will be working together to reach compromises that enable both parties to recover from the crisis. With the ban on commercial lease forfeiture approaching its end date and furlough support ending in October this year, collaboration between landlords and tenants has never been more important. Where complex issues do arise, the parties should seek professional legal advice to avoid the escalation of disputes.