Working from home is terrible news for landlords

The market values of commercial real estate companies have plummeted, and Covid-19 will accelerate it.

Published Fri, Jul 31, 2020 · 09:50 PM

EARLY on in the pandemic, reports of the death of the office appeared greatly exaggerated. But as Covid-19 lingers and second infection spikes dot the global map, something is changing in how employees and employers view the workplace: It is being seen as an option rather than a necessity for many white-collar workers.

Once we get the pandemic under control, this shift will be welcomed by costcutting companies and staff who dread the daily commute. But for the owners of commercial property, already reeling from the move away from brick-and-mortar retail, the consequences may be severe. The market values of commercial real estate companies, such as Land Securities Group and British Land, have plummeted.

This is not just a question of tech workers at Alphabet, Twitter or Facebook taking the relatively straightforward step of doing their stuff from home. All kinds of companies are making the same calculation. Alan Jope, boss of consumer goods giant Unilever, does not see 100 per cent of workers ever returning to offices. Swiss bank UBS Group AG says a third of its employees could keep operating from home.

With property being a big business cost, employers would love to cut their space. Burberry Group is exploring whether it can save money on its offices outside the United Kingdom.

Analysts at UBS assume that, on average, working one or two days a week at home could become the norm. That would have big implications for office vacancy rates, which have a close correlation to rents.

In London's West End commercial district, for example, more home working - together with an impending recession - could mean the vacancy rate rising from 3.3 per cent in the first quarter of 2020 to just over 10 per cent at the end of the year, UBS said. It might still be 11.5 per cent in 2022, the bank said.

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The real crunch would not come immediately. Susan Munden, an analyst at Bloomberg Intelligence, notes that commercial tenants are tied into leases, and there are heavy costs in exiting rental agreements early. At the biggest European real estate firms, average leases are four to eight years.

Better news for the property industry is that it will be able to reuse commercial space as residential developments, assuming people still want to live in cities once the pandemic ebbs. By cutting supply in this way, UBS estimates that the West End office vacancy rate could stabilise at 5.1 per cent by 2025.

And the office would not disappear altogether. While Zoom does well enough for the more transactional elements of work, there is no substitute for face-to-face interaction when collaborating on a creative project, building trust with clients or mentoring staff. Yet landlords will have to work harder. Tenants already wanted modern, environmentally friendly buildings with good quality air, outside terraces and facilities such as bicycle storage. Covid-19 will accelerate this trend.

British Land has taken note of the change, refurbishing parts of the flagship Broadgate estate that it manages in London. Gecina SA, a Paris property specialist whose mission is to "design, build and manage living spaces to enrich the experience of our customers", saw its net asset value rise in the first half of this year.

Offices may need to retain space to make sure that desks can be kept the right distance apart. Given more stringent hygiene requirements, hot-desking might be less desirable. Meanwhile, if the office is used for more collaborative work, more room might be set aside for meeting areas. British Land is already seeing demand from companies seeking short-term overspill space. BLOOMBERG

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