The future of the office
The trend towards home working is not a new one. It was well-established prior to the global outbreak of COVID-19, albeit more prevalent in certain sectors such as IT and marketing, than others. Now, its acceptance has become broad-based, in what is likely to be one of the most enduring economic and societal changes brought about by the pandemic. But what does this mean for the future of the office?
Among the more pessimistic prognoses for the office is that it is being fatally disrupted by technology; that Zoom and Microsoft Teams will do to the office what Amazon did to physical retail. The analogy is superficially compelling, but closer inspection reveals its falsehood. Online retail benefits from both a broader sales platform and lower costs than physical retail, and these factors combined have led to its recent dominance. By contrast, substituting physical employee or client meetings with virtual interactions benefits only the cost line – in the long run, it may actually hinder top-line growth due to lower employee productivity or weaker client engagement. Videotelephony has become an increasingly important complement to the office, but it is unlikely to replace it entirely. Home working and office working both have their benefits and drawbacks, and the likelihood is that a balance will be struck between the two in the long run.
Working from home has much to recommend it. Employees have the flexibility to choose when and where they work, allowing them to better balance their career with family and other commitments. There are also obvious cost benefits, with significant savings to be made on commute expenses, lunch, coffee and other sundries. For the employer too, costs can be cut in the form of rent, service charges and utilities. In a broader context, society and the environment are long-term beneficiaries of home working: with less commuting comes lower emissions and cleaner air.
But there are numerous long-term disadvantages too. For many, increased employment flexibility means longer working days and an unwelcome blurring of the boundaries between work and home. Not everyone wants to spend more time with family, either: Co-op Legal Services reported a 42% year-on-year increase in divorce inquiries between late March and mid-May of this year. There is also the social element of the office to consider: seeing co-workers on a daily basis, or socialising after work, are core parts of many people’s social lives. For some employees, and particularly those who live alone, home working can lead to a feeling of isolation and loneliness, with implications for long-term mental health. Furthermore, from a career development point of view, the office environment provides the opportunity to network with colleagues and external contacts, and to forge lasting business relationships through regular face-to-face contact. From an employer’s point of view, too, there are practical difficulties to home working. How do you train new staff effectively on a remote basis, without the opportunity to learn passively from experienced colleagues or more actively through personal mentorship? Perhaps more importantly: how do you instil the right culture? And for experienced workers, how do you recreate the opportunities for collaboration, idea sharing and innovation, provided by the office?
Ultimately, the relative importance ascribed to these competing factors may display a generational bias. Older workers, with families, bigger homes and longer commutes, are likely to prefer the home-working option. Young people, however, without a dedicated or comfortable workspace at home, and with fewer out-of-work commitments, may prefer the convenience and “buzz” of the office, and the ability to socialise after work. For companies looking to attract young talent, the office is therefore likely to be an important component. However, if it is only half-full at any given time, does this mean businesses will need only half the space they used to have? Not necessarily…
Office densities in the UK have increased significantly in recent years. According to the British Council for Offices, densities were 9.6 sq m per workplace in 2018 compared to 11.7 sq m a decade earlier. Estate agent Knight Frank estimates that 12.5 sq m (135 sq ft) per workplace is the minimum required to achieve social distancing, so in the near term, lower office densities will be needed simply to meet mandatory requirements. However, preferences for greater personal space and public hygiene will probably be enduring social legacies of COVID-19, putting downward pressure on densities in the long run. In this scenario, the most in-demand offices are likely to be flexible, reconfigurable modern buildings in attractive locations, with plenty of open spaces, best-in-class ventilation and air-conditioning systems, and a wide array of amenities. These spaces need to be able to accommodate the peaks and troughs of office demand (what if everyone wants to come in on Monday, for example?) and may not ultimately differ much in size from our current offices.
Another reason why businesses may not need to downsize is that for many office tenants, particularly in areas such as financial services, technology and media, rents are not a major component of their overall expenses. If we take the City of London office market for example, rents as a percentage of salary payments averaged 21% in the 1980s, but this had fallen to 12% in the 1990s and was only 6% in 2019, according to data from property developer Derwent London. By comparison, for retailers, rents amount to closer to 40% of the level of staff costs, according to the Property Industry Alliance, making the viability of retailing much more sensitive to property costs than is the case in the office sector. These factors are borne out in recent rent collection statistics. Four of the biggest UK landlords – Landsec, British Land, Derwent London, and Great Portland – have recently reported average office rent collection at 85% for the recent September quarter day, but just 38% on average for their retail properties. Even for those businesses that do decide that a reduction in office space is desirable, this is unlikely to happen immediately. According to a report by MSCI and BNP Paribas, the average lease term for offices in the UK was over 6 years in 2019.
While offices in the UK are likely to experience a cyclical downturn in the wake of COVID-19, with rising vacancies and pressure on rents, a more structural decline is less likely. Offices, in many ways, reflect our nature as social animals, and while they may look very different in the future, they will probably remain an important part of our working lives.
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