prediction series: 5 of 6

Simon Johnson, Director at Incendium, has shared his predictions for the world of corporate office space in the aftermath of COVID-19. This article is part of a series of six, with further instalments published here.

Instalment 5

Prediction 3: “The continued rise of flexibility – a challenge to landlords and the leasing market”

If COVID-19 has taught us anything, it is that uncertainty is certain. The pandemic has swept the world indiscriminately and has cut a rapid, scything and devastating path. Not all external or indeed internal influences will be as far reaching, or dramatic, but influence they will and we need to be able to adjust and adapt.

The property industry, especially relating to the corporate office market, has not really evolved much in the last 50 years in terms of how landlords and occupiers inter-relate. The prime office market, in particular, remains heavily skewed towards long term leases where much of the risk and burden sits with the occupying tenant.

I have long found this a huge frustration when dealing with institutional investors whose sole concern is long risk-free income that drives bond equivalent investment yields. Let’s not forget who actually creates this value by entering into these long term leases – yes, the tenant!

There has been a growing trend towards increasing flexibility, through more flexible approaches such as serviced office space and shorter-term managed lease solutions. However, this remains very much at the margins, with flexible office space accounting for some 5% of the total market.

Any material reduction in demand for office space and any material increase in demand for occupational flexibility will create a supply and demand imbalance that will dramatically impact the market and require a fundamental rethink.

Tenants will demand increased flexibility, will be unwilling to commit the same levels of capital and will be unwilling to accept the same levels of risk as before. The market (both landlords and investors) will need to respond to this in the way that leases are structured, the way that property is financed and the way that risk is both assessed and allocated.

There is already an active and growing intermediary market that recognises these factors and is responding to this pre-existing trend, however I predict that coming out of this crisis the speed and scale of change will be swift, decisive and permanent. Landlords and investors take heed.
Prediction 4: “Business continuity – a permanent shift”

The COVID-19 crisis has been a monumental exercise in business continuity and disaster recovery, not just for companies, but for individuals and nation states alike. What are we learning? That we are far more naturally resilient than we previously thought – or had perhaps forgotten.

Who would have thought that the vast majority of office workers would adapt so quickly and effectively to working from home, that IT and broadband networks would hold up so well and that employees and employers could cope as well as we have (to date).

I believe this signals a permanent shift relative to business continuity planning, both linked to delays in projects associated with property change as well as event-based disasters.

Previously the assumption had been that some people could work at home for a period of days, critical functions required immediate re-provision of space and that supplementary/replacement office space would been needed for the majority rapidly.

Already, for a period of days read weeks or months (maybe longer), criticality of functions has been urgently revisited, non-critical activity paused and there is no ability to re-provide office space (anywhere). And yet, business operations in the main continue.

This should tell us all that we can be far less conservative in this domain and that homeworking should be a far greater strand of all business continuity and disaster recovery planning.

The sixth and final instalment of the series is due to be released here on the 22nd April 2020.

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