October 28, 2020

Bleak Winter Ahead For Central London As Workers Told Not To Come Back To The Office

The return-to-the-office plans of companies big and small and their landlords, the recovery prospects of cafés, bars and restaurants — all have been torn to shreds by the government’s announcement Tuesday that Britons should go back to working from home if they can. And with those plans go the hopes that 2020 might see a rebound for central London property owners.

“This will be devastating for a lot of businesses that were already struggling,” London Property Alliance Executive Director Charles Begley told Bisnow

For the businesses that rely on office workers, in the retail, leisure and service sectors, another prolonged period with massively reduced footfall presents an existential threat if the current safety measures are not supported by government financial assistance.

An empty Liverpool Street Station in London.

And for office owners in areas like West End, City and surrounding districts, the advice for staff to work from home for as long as six months means that the moment when they might start to understand how people will use office real estate is further deferred. Any recovery in the moribund occupational market is put on hold, and uncertainty about future demand continues. 

The UK-wide measures, announced by Prime Minister Boris Johnson as a way to combat the fast-rising rate of coronavirus infections, are already having an impact on the behaviour of large central London office occupiers.

HSBC, Barclays, Goldman Sachs, PwC and the Lloyds of London insurance market have already put back-to-the-office plans on hold, City AM, the Evening Standard and Bloomberg reported.

The biggest immediate impact is on those businesses that rely on office workers for their revenue: sandwich shops and cafés, pubs, bars and restaurants. 

For every 100 central London office jobs, 18 are supported in the retail, leisure and hospitality sectors, research by Arup for the Westminster Property Association found.

“A lot of these jobs in hospitality and the service sector are among the lowest-paid in London, and so this will have a big impact on the most vulnerable part of our society,” Begley said.

He added that an analysis by the LPA, which represents the interest of more than 400 central London property owners, found that the economic impact of the new work-from-home policy on London was likely to be about the same as the impact of a full lockdown, if the rules stayed in place for several months.

“We are not saying we oppose the measures, and we understand the need to keep people safe,” he said. “But if the government thinks that from an economic perspective this will have a more benign impact on jobs and livelihoods than a full lockdown, then that is not the case.”

For that reason, the LPA is one of many bodies joining the chorus for the new measures to be accompanied by financial support from the government. 

“If government is going to introduce these measures, the other side of the coin is that it also must help businesses that, through no fault of their own, are fighting for their lives due to COVID restrictions,” Heart of London Business Alliance chief executive Ros Morgan said.

“We are therefore calling for continued government support for employees affected by the impact on central London footfall, such as those working in hospitality, culture and retail, to avoid a cliff edge when the furlough scheme ends in October. This should be part of a wider package of business support measures, including extending the business rates holiday and increasing the threshold for eligibility for the Retail, Hospitality and Leisure Grant Fund so that it can help in central London.

“Central London has so much to offer in terms of culture, retail and leisure. But for it to be there for us in the good times, we need to be there for it in the bad times.”

Shopping streets and malls could be even emptier if leases don’t evolve.

The government’s furlough scheme, whereby it pays up to 80% of the wages of furloughed employees, is due to come to an end in October. On Wednesday, the government said it was looking at introducing new financial support measures. This could include a more tailored package where employers and the government share the wage burden of staff that are only able to work part time due to reduced demand, according to the Financial Times.

For office owners dreaming of an uptick in demand for space as workers returned to offices and businesses resumed planning for the future, that hope has been dashed. Take-up of central London office space was 1.2M SF in the second quarter of 2020, down 61% on the same period in 2019 and well below the long-term average of 3.2M SF, according to BNP Paribas Real Estate.

Data is incomplete, but even before this week’s announcement, office occupancy was moribund in London next to other comparable European capitals, Workthere data showed. Enquiries for new flexible space had been steadily improving from April lows before this week’s announcement, according to brokers like Workthere and portal HubbleHQ, but that trend will now likely reverse.

In Q2 central London, rents fell by an average of 3%, according to data from DeVono Cressa, with falls of 8% seen in Mayfair and Soho.  

“Fundamentally, it’s been tough for everyone, and the pain has been shared between the landlord community and flex operators,” Convene Vice President of Real Estate Elliott Sparsis said.

Convene is in the process of opening its first London locations, and Sparsis added that demand had remained strong throughout the pandemic, with changes to working patterns both short-term and long-term working in favour of the flexible office sector.

“Flex operators will outperform in the long run,” he said. “Companies want to protect the capital on their balance sheet, they don’t know what the future holds, and so they are willing to buy into the flexible sector.”

For the optimists in the flex sector, this is just a bump in the road.

“What we’ve seen from the first lockdown is this is just further disruption at the micro level, versus the larger opportunity coming down the road,” Convene Vice President for Business Development Sebastian Abigail said. “In the context of a large real estate cycle, this is not that big a dip. We are seeing demand come back in a big way. It won’t be back where it was in three months, but it will be in 12 or 18 months.”

The longer-term impact on company productivity, and the way office occupiers will eventually use workspace, are perhaps the biggest talking point in global real estate, indeed global business, right now. The answers are not going to be any clearer in the days after a major announcement like that undertaken by the UK government. 

But beyond the impact on the service businesses that rely on office workers, some providers of office space highlight how the extension of working from home will have hard-to-measure, but significant, impacts on their tenants, and the economy more broadly. 

“It is clear that a lot of our clients are going through tough times and need to pivot their business or onboard new staff,” Fora Head of Data and Insight Judith Kleine Holthaus said on a Bisnow webinar. “These are the kind of things that require creativity and transformative energy, the things that require people to be in a room together solving problems. That can’t be imitated on a video call.”

A silver lining, if there is one, is that this period gives landlords and businesses more time to prepare for the return to the office when it does come.

“It will give asset managers and landlords more time to work out how they are going to reoccupy quickly when workers do come back,” Equiem Head of Business Development for the UK and Ireland Cali Hyde added on the webinar. “What systems are they going to use for access management and room booking? It is not much to hold on to, but there is that.”

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