When all non-essential workers were asked to stay at home in March last year, offices, shops and restaurants across the UK were left empty. Now, 18 months into the pandemic, there can be no doubt that both leaseholders and landlords have had to significantly reassess the demand for – and purpose of – commercially leased spaces in the future.
As leaseholders have navigated the pandemic, some from the comfort of home offices and others through the lifeline of government support packages, questions have naturally arisen about the cost-effectiveness of the spaces they occupied before the pandemic, and whether they fit into their long-term strategies now.
At the time of writing, England has ended the directive to work from home if you can. Businesses will be weighing up the issues of staff welfare, productivity and the best return on investment for the rent on city-centre office space when implementing strategies to bring staff back to their offices.
What type of office space will returning employees want and expect? The previous standard for modern design was that it had to be open plan – the assumed preference of millennials, which would provide a contemporary look and attract new talent.
Perhaps those assumptions no longer apply, and a cellular office with improved ventilation and a controllable climate is preferable, if we as a society are to build resilience to future pandemics into our working environments.
On the other hand, landlords have struggled through the pandemic with inconsistent rent payments. Indeed, some tenants have entirely defaulted on their debts even when their businesses remained viable and they could afford to pay. Owners of real estate in city centres have arguably been hit the hardest, with many workers flocking to the countryside or seeking working, shopping and leisure arrangements closer to home.
Both sides face an age-old problem here: leaseholders are looking for worthwhile investment that will satisfy their requirements as companies, as well as those of their employees, while landlords are seeking not only to renew interest in their commercial spaces but also ensure their rents will be paid.
'What type of office space will returning employees want and expect?'
One increasingly popular response to this problem is introducing more nuance and specificity to commercial leases, in order to better fit the occupiers' needs. This is a win–win, because leaseholders can be sure they are paying for commercial space that suits their needs, and in turn the landlord has more security, knowing that the occupants are committed to using the space and upholding the lease.
While this will not necessarily result in offices being used to the same extent as they were before the pandemic, it has already promoted healthy debate on the future function and evolution of the office and other commercial spaces.
The key questions remain, however: how much space does a business need, for how long, and where should it be located? Are satellite offices the answer, and will they work for small and medium companies, particularly where collaboration is required and people do not all live nearby? How far from the office can your staff move?
Commercial leases are thus increasingly about providing the space leaseholders need at the time they need it, the so-called space-time concept. This has resulted in, for example, people attending offices in rotation.
The individual office employee now has greater choice about how they work – something that would have taken decades to achieve without COVID-19. Although the virus has prompted resistance to an early return to offices, however, it is likely that people will go back as the vaccination programme progresses, and people feel safe in their workplace.
The demand for properties with outdoor space has definitely increased. The overall effect on both commercial and residential property has been a move out of towns and cities into the countryside, as commuting becomes less and less necessary.
However, commercial real estate has been traded through the commercial lease for hundreds of years, and over this time a complex set of rules and practices has been developed to manage it. Any proposed change to this model must accommodate the concessions made during the pandemic, at least initially.
Some tenants are already rethinking their strategy for disposing of space. It is possible that we will see a move towards shorter-term leases, or longer leases with more frequent break options, in order to give both parties more protection. Rolling breaks may also become more prevalent, where leases are terminable following service of notice from one party to the other at any time.
Working from home is still likely to remain a longer-term option as office-based businesses look to make changes. Even if cutting costs is not a priority, the reduced number of employees permitted in the office at any one time for the foreseeable future could lead to space not being used as efficiently as it once was.
With the uncertainty of COVID-19, wide-ranging legislative measures have been introduced to protect tenants from the consequences of non-payment of rent. But these have left landlords with very little in their armoury.
Consequently, landlords may take more precautions to maximise their ability to recover rent in future. These are likely to be in the form of rent deposits or guarantees, or – where previously either one of those would have sufficed – both.
Rent deposits are typically equivalent to three to six months' rent, but it is possible that we will see deposits for up to 12 months being requested. Landlords may also ask for guarantees from multiple directors of the tenant, where before the pandemic it would have been acceptable to have just one serve as a guarantor.
For landlords, these additional protections might be seen as quid pro quo, given the number of measures favouring the tenant.
'Landlords may take more precautions to maximise their ability to recover rent in future'
As tenants' demands for their space becomes more nuanced and specific, landlords are needing to refine their leases and their spaces, improving their appeal – especially in terms of environmental, social and governance values.
Surplus spaces that are not improved will simply be occupied by other businesses. History has shown that when people do move out of space, it is filled by others. There is no reason to doubt that this will be the case post-pandemic either.
As the occupier base becomes increasingly discerning, it is up to the real-estate sector to ensure that spaces work in a better, smarter and more sustainable way for everyone.
Related competencies include: Leasing and letting
Prof. Sara Wilkinson FRICS, Dr Gill Armstrong, Dr Kusal Nanayakkara, Mark Willers FRICS, Prof. Jua Cilliers and Dr Robert Fleck 08 December 2023