As a result of the Coronavirus Act 2020, a moratorium has been placed on forfeiture of commercial leases for non-payment of rent (more information can be found here). Consequently many tenants who occupy office space are withholding rent in order to protect cash balances, which in turn affects landlords and investors who rely on the income stream generated by the rents. Tenants tied into longer lease arrangements for their office space are now considering whether they will need the same amount of space in the future, and many are engaging with landlords in an attempt to formally reduce, suspend or re-gear rents. As a result, investors may consider whether or not to divest or diversify in respect of office portfolios.
The flexible and co-working office market had experienced a boom in recent years, driven largely by the rise in tech companies and start-ups. However, the current pandemic has caused particular problems for landlords of co-working space who, by their very nature, offer flexible lease terms – often with a rolling ability for either party to terminate the tenancy on short notice. Given the narrow margins that many co-working occupiers operate on, it is no surprise that a number are seeking to remove the unnecessary expense of rent whilst they are forced to operate their businesses remotely from their homes.
So what does the future hold for offices and their occupiers?
With many corporate networks currently under strain as the majority of employees access systems remotely via virtual private networks (VPNs), we can expect to see an upscale in IT infrastructure which supports this way of working for the long term. Indeed, with many businesses having already invested heavily into agile working infrastructure in recent weeks and many seeing productivity maintained, some will consider whether they can in fact offset these costs by reducing the amount they spend on rent and rates in the future.
A fall in demand for office space would likely yield lower rents across most markets, at least during the short-term. Similarly, an oversupply of offices in many key locations would see tenants able to negotiate shorter lease terms, rent incentives and tenant break options.
Although an early casualty of the social distancing measures which have been imposed, landlords of co-working space could see a rise in demand in due course from occupiers who traditionally opted for exclusivity under longer lease agreements. Clearly flexibility will be the key appealing feature for those who still require a bricks-and-mortar office presence.
As an aside, if the upscaling of home working is as dramatic as some predict, this also raises questions as to whether large-scale transport infrastructure plans should be placed on hold or scaled down if the demands of daily commuters diminishes as a result of the pandemic.
From a human resource perspective, when normality returns (whatever that may look like) we can expect an increase in employees formally requesting that they continue to work from home on a full or part time basis. With businesses already providing the infrastructure to support this it could be difficult to justify a business case for denying such requests.
A 2016 study by Forbes showed that increased flexibility to working patterns can create improvements to morale, productivity and engagement and that generally those that work remotely are happier. However, businesses that have traditionally operated within an office environment will need to strike a balance in the future. The majority of us thrive on human interaction and additionally the benefits of working collaboratively and sharing knowledge within, for example, an open plan office cannot be underestimated. Tools such as Microsoft Office, Skype and Zoom have been in high demand recently and are able to bridge the gap between isolation and collaboration to some extent, but currently are no substitute for direct interaction with colleagues. On a related point, there is also the impact on employees' mental health to consider if home working becomes a long term reality.
In conclusion, following the seismic economic and social upheaval caused as a result of the COVID-19 pandemic we can expect to see changes in how office space is utilised in the future. Those businesses working from offices that were overcrowded prior to the pandemic will now most likely promote pro-active agile working policies with a view to supporting a blend of both office-based and remote employees. Businesses will likely seek to invest further into the infrastructure that supports homeworking ahead of investing in new and larger premises. Continuing tenants of traditional offices will have greater bargaining power to negotiate lease terms which are both more favourable and more flexible, whilst other occupiers could consider a shift towards tenancies within co-working space in order to have the ability to expand and contract their office presence with greater ease.