A sign of the times? A Private Bank is reducing its office footprint in Manchester by 24%. Brown Shipley is moving into the 14th floor of No.1 Spinningfields. Meanwhile, the current occupier of that suite, the law firm Browne Jacobson, will relocate to a suite of just 6,670 sq.ft. on the Third Floor thereby reducing its footprint by 41%.
The UK’s office market is finally starting to awaken with a growing number of occupiers taking decisive action.
After almost a year of uncertainty the success of the UK’s vaccine roll-out is giving many the confidence to plan for an eventual return to the office albeit, often involving less floor space than before.
Since the start of January we have witnessed more and more businesses implementing relocations, upgrades and re-configurations. Lease renewals are being initiated, break notices are being served and more tenant space is being released to the market.
Landlords are also busy making plans in anticipation of increasing supply and changes in occupier requirements. Some are adjusting their asking rents whilst others are making physical changes to the growing amount of vacant space they have available.
This renewed activity is creating opportunities as well as challenges for both landlords and tenants.
Slater Gordon is one of many law firms attempting to cut costs by encouraging staff to work from home. In Manchester, it is now trying to dispose of the whole of its 103,000 sq.ft. office at 58 Mosley Street. It has already closed its office in the City of London.
Here are some of the highlights of the changes currently taking place.
Greater Availability
One of the main consequences of the pandemic is that there will be less overall demand for office space in the immediate future. The success of home working means that many businesses will be able to make do with less physical space. Up to 40% less, in some cases.
For example, the Private Bank Brown Shipley announced last week that it is moving its Manchester office to No.1 Spinningfields where it will lease the 14th floor on a new 10 year lease. The suite of 11,342 sq.ft. is a direct replacement for the 14,500 sq.ft. it currently leases at nearby 3 Hardman Street. This represents a 24% reduction in its footprint in Manchester. At the same time, another law firm Browne Jacobson will move out of the 14th floor of No.1 Spinningfields and relocate to a suite of just 6,670 sq.ft. lower down the building. That will reduce its footprint by 41%. This re-shuffling of tenants is likely to become increasingly common as occupiers assess their space needs in a post-Covid world.
280 Bishopsgate, London where law firm Baker McKenzie is understood to have reduced its pre-let commitment by 10% as a result of the pandemic
The story is similar elsewhere in the UK. For example, Dentons which is the largest law firm in the world (by headcount) has closed its regional offices in Aberdeen and Watford encouraging staff based in those locations to work from home permanently. Meanwhile in London, another law firm Baker McKenzie will be downsizing its pre-let of 153,000 sq.ft. at 280 Bishopsgate which was signed in July 2020, by 10%*. In a more extreme case, the US software developer Salesforce has just announced that it will offer all its employees the option of working remotely on a full-time basis**. The firm currently leases 136,000 sq.ft. at 110 Bishopsgate.
Of course, there will be exceptions. In some companies, where office densities were at a relatively high level before the pandemic, more physical space may actually be required in the immediate future in order to comply with social distancing. These requirements may be with us for many years to come, who knows.
No one knows exactly how much less office space will be demanded. But so far, the evidence is certainly pointing to a significant reduction over the next 3-5 years.
Lower Rents and Less Tax
Greater supply will have some obvious consequences, as well as some that may be a little less obvious.
For tenants seeking to dispose of space which is surplus to their needs and for landlords with vacant space to let, it will mean greater competition and perhaps longer and more expensive marketing campaigns. This will probably mean lower, if not negative rental growth and as a result, higher investment yields. This in turn will mean a decline in asset values, lower dividends for investors and less overall tax revenue for the Government.
So, good news for tenants looking for new space but bad news for those looking to realise profits from selling it.
The Rise of “Plug & Play”
The more fully fitted tenant space that comes to the market, the more pressure landlords will be under to provide fully fitted options themselves.
Some landlords have already responded by starting to speculatively install meeting rooms and break out areas within their vacant suites. Some are even providing desks and I-T infrastructure. They are doing this so they can compete with the tenant space they know will shortly be available elsewhere in their buildings. They are also aware of the threat posed by serviced office operators who already offer fully fitted options.
Smaller Suites
As increasing numbers of companies reduce their office footprint, the demand for smaller suites will rise. This explains why many landlords are now starting to split floors into smaller lettable units.
This is good news for existing tenants that need to flex as it should open-up more opportunities for them to either take on or hand back smaller chunks of adjacent space.
More Collaboration Space
Even pre-Covid, there was a move to offer more communal collaboration space within multi-let buildings. This was in recognition of a growing trend referred to as ‘Agile’ or ‘Activity Based’ working. This concept allows employees to switch between a variety of environments or work settings during their day.
This trend is set to continue as evidenced by the increasing amounts of collaborative space being created within both new build offices and refurbishment schemes.
Time to Upgrade?
For those looking to future proof their offices, 2021 should provide some great opportunities as more and more tenant space comes to the market. Equally, for those that are happy to remain where they are, it should be a great time to re-gear your lease. For those with an imminent break option, it may be time to unlock hidden value as landlord’s seek to preserve their cashflow.
*source: lawcareers.net
**source: The Daily Telegraph Business, 11 February 2021
If you would like advice on how to make the most of the emerging Tenant’s market either in the North West or elsewhere in the UK, please call Martyn Markland on 0161 457 1422 or email him at mm@tenantag.co.uk.