Numerous key factors have dramatically impacted the UK office space landscape in recent years. Changing employee demands and ever-evolving communications technologies have resulted in a world of work that is much more diversified, decentralised, and agile than seen in years prior.
The adoption of hybrid working practices and the flight to quality seen within the UK office space market stand as two such factors that have undoubtedly altered the landscape across multiple industries. This article will explore these two concepts and provide a general explanation of the way in which these two concepts have changed the market, whilst also providing insight on potential future events.
Is the Adoption of Hybrid Working Practices Lowering Office Space Requirements in the UK?
The rise in hybrid work-types across the UK has resulted in a general reduction in office space requirements, seen in most of the major regional markets.
Given that the UK office markets are still attempting to recover and rebuild in reaction to the COVID-19 pandemic, many hybrid adopters have struggled to determine just how much space they need moving forward.
One way to gauge the impact of hybrid working models is to examine leasing activity before and after the pandemic, comparing the size of new leases signed against those previously occupied.
Since the start of 2021, deals above 10,000 sq/ft in the UK’s nine biggest office markets have seen a net 8% decrease in the amount of space occupied by businesses (when moving to new offices). Despite being far lower than some of the more pessimistic forecasts of around 20%, this figure supports the idea that occupiers are trying to downsize their office premises in order to accommodate hybrid working practices.
Occupants of smaller spaces also seem generally more prepared to pay higher rates for prime office space, due to the markets’ ongoing flight to quality. As a result, as compared to 2019, the quantity of deals for office space at £35 per sq/ft or pricier grew by 210%.
Professional sector leading the charge for downsizing in regional office markets
The professional sector is one that has shown a clear propensity for downsizing physical office spaces. Companies situated in nine core regional markets who opted to relocate their offices after the start of 2021 decreased their square footage by 28% across 30 new lease agreements. Contrary to this, however, occupiers in industry are choosing to expand their office footprints in Central London.
Despite the disparity between regional markets and Central London, this data shows that organisations in the professional sector plan to continue using a hybrid or, in some cases, fully-remote working model moving forward. Similarly, relocations in the Insurance and Financial Services Industry saw a 38% drop in overall space.
Despite this, not all major business sectors exhibited a tendency towards smaller offices
In fact, the desire for larger floor plates among IT businesses across the UK has increased significantly during the post-pandemic era. According to statistics from Savills, tech businesses moving to six of the nine largest regional markets in the UK have boosted the amount of office space they occupy by 77% since the start of 2021.
A strong indicator of why many firms in this industry have been seeking to boost their level of office space throughout these markets is the fact that the TMT (Technology, Media and Telecommunications) sector has been the most active, from an occupational standpoint, in four of the last five years.
Flight to Quality Further Influencing the UK Office Market
According to the most recent CBRE UK Office Market study, demand for premium office space remains strong. The revenue and long-term performance of CRE assets are closely connected to how well tenants are able to run their businesses in these spaces, not simply the length of lease agreements.
However, leasing office space entails more than simply giving the tenant a roof, internet connection, and place to put their desks. The way office spaces are run has a significant impact on tenant business plans and, ultimately, their level of success. Top tier office spaces have the most to offer their occupants, setting them up for future success by enabling growth.
All sorts of office spaces now have the amenities and facilities to call themselves top tier workspaces, from private serviced offices with on-site management to casual coworking spaces for entrepreneurs on the go. One thing that all of these elite offices share in common is an undeniable quality that is highly appealing to businesses in the post-pandemic world of work. Whilst working from home has a number of notable benefits, including improved work-life balance and the elimination of potentially long commutes, a lot of businesses and freelancers are finding themselves starved for the amenities, services, and perks provided by Grade A office space. A number of flexible office providers have popped up to satisfy this demand, providing tailored spaces designed to suit the unique requirements of tenants looking to make a return, in one form or another, to physical workspace. Flexibility is something that was growing in popularity prior to the pandemic, however, demand has only now truly reached a fever pitch.
Many businesses have also started seeing new or revamped office spaces as a way to entice new employees into the fold, as the acquisition and retention of top talent continues to be essential to long-term success. These businesses are also looking at the ways in which office spaces can align with social and environment objectives, with particular emphasis being placed on sustainability.
In Q2 2022, the demand for premium office space remained strong across the UK, with four of the five largest purchases relating to newly constructed or early marketed Grade A space. The largest pre-let was 130,000 sq/ft by GPA Capital on First Street in Manchester.
Although the tech sector, and TMT broadly, is particularly relevant to these demands, many other types of businesses are quickly catching on. In fact, when it comes to take-up of Grade A office space in the last 12 months, business services (22% of all take-up) and creatives (19%) have accounted for a significant proportion.
Ultimately, the types of workspaces that bigger occupiers are seeking have clearly outlined a trend towards high-quality fit outs; featuring strong sustainability, a focus on worker wellbeing, world-class amenities, and access to a wide range of adjacent facilities.
What Does This Mean for the Future of the UK Office Landscape?
The proliferation of hybrid work and noticeable shift towards flexible Grade A office spaces will undoubtedly colour future trends and serve as the bedrock for new office providers entering the market. As businesses and employees continue to place stock in high-quality office spaces and the flight-to-quality extends across the country, expect to see traditional office providers put their best foot forward by innovating and expanding their offerings to capture the eye of tenants.
Also, expect to see some businesses pivot away from traditional leases, instead opting to pay for coworking memberships for their employees to facilitate hybrid schedules. Coworking providers will also be looking to expand their offerings to make themselves as attractive as possible in a highly competitive market.
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