5th June 2020
Martin’s Properties Virtual Round Table recently discussed the immediate and long-term implications of Covid-19 for property with a panel of well-known, leading industry experts focused on the many implications of lockdown and the pandemic for real estate. CoStar News moderated.
Richard Bourne, Managing Director, Martin’s Properties
Gregor Bamert, Head of Real Estate Debt, Aviva
Lee Elliott, Partner Commercial Research, Knight Frank
Mark Philipson, Co-Founder Quadrant Repurpose
Jason Sibthorpe, Principal & President, UK, Avison Young
James Thornton, CEO Mayfair Capital
Chair Paul Norman, CoStar News
CoStar: In terms of working from home and the future of offices is this the new norm or is everyone desperate to get back into the office and what will the offices of the future look like?
Across the board the panel found that within the property industry working from home had been surprisingly easy and efficient across whilst highlighting a generational difference, with those finding it the hardest being flat sharing graduates and young families.
Whilst many of the organisations represented had office closure contingency plans in place, these were largely in case of terrorism requiring colleagues to work from different locations. The ease and speed in which cloud-based systems could be switched on was a huge positive and it is anticipated to have accelerated new trends in the development of offices in various ways.
Gregor Bamert, Head of Real Estate Debt, Aviva, said: “In terms of strategy it has reaffirmed our view. Certain places are good at bringing together people in higher value industries working collaboratively. If you have a so-so office bringing people together and paying quite a lot for them to do routine tasks, then that will probably not happen to the extent it has in the past.”
One industry that has benefited has been video conferencing, with providers such as Zoom reporting 300 million daily users, resulting in their share price increasing by 130% this year. Technology was deemed to have been the biggest contributor to the rise in communication across organisations during the Covid-19 crisis, with senior figures allocating an increasing amount of their time to the welfare of their employees and identifying this as a key part of their role.
Richard Bourne, Managing Director of Martin’s Properties is looking at all factors. “I am a big advocate of the office but it needs to be a place that is fun, spacious and vibrant. In terms of working from home we may move to work from home days where we all work remotely. The reason we have the office is to train, educate, collaborate, socialise and share knowledge and ideas. Therefore, there is little point in the office if we are not all together. So for me it’s about being in or out as one. We need to evolve in order to retain and attract quality staff and some flexibility will be key. I’m currently looking at redesigning the office with a brief to create an office that staff want to go to, rather than work from home.”
James Thornton, CEO Mayfair Capital, said: “We are very wellness aware and as CEO, I have spoken to every member of the team on a twice weekly basis for half an hour. Although time consuming, this has been a very positive experience and I have particularly enjoyed engaging with the younger and newer members of the team.”
Lee Elliott, Partner Commercial Research, Knight Frank, said “the form and function of the office will change. There were too many people commuting to London to send emails. The future of the office will need to be a place to socialise and collaborate with colleagues.”
Some panellists predicted that the office of the future will become more of a choice for employees, with the onus on organisations to create offices that people choose to go to.
Mark Philipson, Co-Founder Quadrant Repurpose, said: “Offices of the future will reflect a company’s corporate identity and no longer be a place to trigger off emails.”
The panel agreed that there would be a small net loss in office space.
Lee Elliot commented: “I think the pendulum from working from home will spring back a little. Currently 47% of people are working from home, but it will spring back as we see this really being around 30% of people in a business. It will be a dispersed model of working and it won’t be binary. The reality is there will be a blend.”
Richard Bourne agreed, adding: “I don’t think we will see a massive loss of office space although I suspect there could be a net reduction in some locations. Whilst I can see a reduction in desk space needs, I think a lot of extra space will be given over to more amenity and breakout space. I think we will see a reversal of the increasing occupational density. BCO guidance used to be 1:10 sq m. I have seen offices designed to meet 1:6 sq m. I think this will shift back.”
Lee Elliot continued: “The death of the office narrative is not new, it has been around for 20 years. But we are still talking about offices and still investing in them. What I do think it will do is turbo charge the evolutionary path of a flight to quality. In a world where we have social distancing going forward in the short term we must deal with that. In the medium term it will make people rethink the amount of space in the office and we will row back from densification. The form and function will change. There are too many people in central London in expensive space sending an email. We need offices to socialise and we will be facing an upskilling challenge. Corporates will take a grow your own talent perspective and will know that in London it is 10 times more expensive to lose talent out of the business than it is to accommodate them at a workstation. The office is a crucial setting for attracting and retaining staff.”
The panel agreed that the evolution of the office and its wider role within society will be accelerated by Covid-19. With a flight to quality, location and flexibility being the priority for occupiers.
Jason Sibthorpe, Principle & President, UK CEO Avison Young, said: “This is an opportunity for business to stop doing things the way they’ve always been done. We will see a significant evaluation and evolution of the role that physical offices play in supporting the various elements of business – productivity and collaboration being two major considerations. We will see much of the workforce unwilling to go back to the way things were before and we need to pay attention to what the future employee needs and wants from their physical space. The physical workspace will still be the key driver of innovation, creativity, collaboration and learning; often by osmosis as a result of being directly with others.”
Lee Elliot agreed and added that “the office becomes a personal choice not an obligation. As a result, rather than the death of the office it leads to polarisation. Investors need to be on the right side of that. Occupiers are pushing towards quality.”
With companies rationalising their workspace the conversation turned to flexible offices and their future.
Gregor Bamert highlighted the need to “differentiate between the provision of more serviced office space by landlords and the financial model some operators have chosen to use. There will be a fall-out from the latter but is the demand there for flexible space? Absolutely yes.”
Lee Elliot agreed highlighting the “reduced capacity in traditional offices”.
“Some organisations will not want to continue to press working from home and will go back to flexible offices. Furthermore, the operating environment we go back into will be highly volatile and uncertain. What you find is people like to align their real estate better to planning horizons. Another driver is a lot of businesses moving forwards in their digital transformation. And increasingly here demand for flex is from the corporate end of the market. Offices might well get to look a bit like hotels.”
The panel viewed this as an opportunity for an introduction of flexible working spaces on the High Street, in some cases taking over space abandoned by High Street department stores as a further opportunity for providers offering a hotel-based model. This was also viewed as a positive for both attracting talent to corporations but also for driving footfall back to Town Centres.
Turning to the High Street, the panel felt that the crisis was exacerbating what was already happening, with the best retailing concepts continuing to succeed but ‘bad’ retail failing.
Jason Sibthorpe commented: “The best retailers won’t be a success if the environment isn’t great, the high street needs sophisticated owners.”
Lee Elliot agreed, noting “If you promoted a solution to the customer it would be a richer conversation. I hope the investment community and property owners and advisers can jump on change rather than expecting it to happen.”
Gregor Bamert provided a lender’s view point adding: “When lending to retail we look to that close relationship between retailers and landlords and the sponsors that know how to manage that. Clearly, the industry has big challenges. What needs addressing is the way in which retail real estate is valued. It is completely unfit for purpose. If you tried to explain to someone outside of the industry how retail is valued they would look at you as if you came from Mars. The valuation methodology does not work. This second phase will really make that clear. We need to look at much more of a DCF-based valuation methodology which reflects trading performance.”
Richard Bourne agreed citing his own experience: “We treat our tenants as customers and acknowledge that it is down to us to attract footfall to our locations, through creating master plans with other local stakeholders. It’s been unfortunate that some customers have gone back to the old Landlord and Tenant type dialogue. I think there needs to be greater partnership going forward and businesses will have to be more open to sharing turnover and forecasting data to work with property owners to achieve tenancy agreements that would work for all.”
James Thornton noted: “Mayfair Capital has been bearish about retail for some time but the crisis could create a step change as people continue to support their local high street.” However, he was much more optimistic about last mile delivery and online retail which he predicts “will be a major growth area for the sector and continue to add real pressure to retailers like John Lewis”.
Looking ahead at the longer term the panel each noted where they see the opportunities for the property market.
They were unanimous in the need to distinguish the short term from the long term. Richard Bourne said the industry needed to “let the dust settle before making big decisions as I think the impact will be different dependent on sectors, geographies and industries” and Gregor Bamert said “the next phase is going to be a lot less pleasant, with people going to the office to make Zoom calls but in terms of the investment horizon it’s not that long.”
James Thornton agreed: “the pandemic has accelerated change that was always coming. We’ve all shown that we can work flexibly but for collaboration we need to be together to generate ideas.”
So what are the areas for opportunity?:
Lee Elliott: “Opportunistically, good multi-let CBD offices in vibrant areas are going to fare well but I would have said that before this crisis. This point is about office as a choice not an obligation. We need to be investing in districts where this happens.”
James Thornton: “We are excited about technology clusters and life sciences which fits strongly with our demographic theme coupled with a huge appetite for data, which will be highly important to medical output. Avison Young is working on the Cheltenham Cyber Park next to GCHQ which can be expected to attract highly tech focussed talent working and feeding off the cyber security industry located there.“
Jason Sibthorpe: “The biggest opportunity is in the response to climate and reducing the carbon footprint. There is a huge opportunity for those that get it right and of course it is paramount. It is exciting for us to make a material change to our social and environmental surroundings.”
Gregor Bamert:“ “It is about providing much more focus on the end customer and Landlords producing an environment that will add value to the tenant customer, that is where the opportunity is. Areas we have touched on are science parks which are very exciting while perhaps people should be a little more wary and take into account the change to online retail when they are considering long lease supermarkets – there may be a question mark there.”
Mark Phillipson: “We have talked about the demise of department stores but there are many uses that can replace defunct retail and will. There isn’t a good enough local provision for health care and more and more are looking at providing healthcare facilities back in town centres – so I think that will be a good use for repurposing. The hotel market will come back and the amount of people in the retirement living sector in most town centres too.”
Richard Bourne: “I think there will be different opportunities over time. In the short-term there will be heavily impacted sectors and businesses and there is the chance to go in and invest and turn these around. I also think there will be opportunities in regional offices, care and last mile distribution sectors over the medium term.”
Finally the panel were asked for their predictions on the recession. Will we see a deep V, U, W or L shaped recession?
Gregor Bamert – For some sectors it could be a lower case h. Following a sharp drop there is a relief rally followed by plateau and then another fall.
Jason Sibthorpe – U
Richard Bourne – Smoother version of a W
James Thornton – U but the stock market could be a W
Mark Phillipson – W
Lee Elliot – U