Agents dismissed talk of the potential death of offices following the Covid-19 lockdown, reporting an upturn in leasing activity in Liverpool and Manchester over the past two weeks. However, they predicted major changes to occupier demand in the short and long term, which will impact the lettings market in the months ahead.
Commentators have predicted that the office market will slow in 2020, as more employees opt to work from home even after the lockdown lifts, and as companies recognise the benefits of flexible and remote working.
However, demand is likely to continue, and even increase, for certain types of office space, according to agents that shared their predictions with Place North West for this in-depth analysis.
- Headline rents could creep towards £40/sq ftthis year, from £36/sq ft, despite the pandemic
- Landlords will have to be flexible as tenants opt for preferential lease terms amid uncertainty
- Manchester is well placed to bounce back from the crisis due to stable levels of demand
- Occupiers are at the mercy of current leases, which may not be suitable to the changing face of business
Will Lewis, director at consultancy OBI, was bullish about the market’s prospects for the rest of the year, predicting that city centre rents would creep up close to the £40/ sq ft mark. He said he could not understand talk around the “death of the office”.
However, the number and size of leasing deals completed in 2020 will likely be lower than in previous years at around 1m sq ft, skewed by BT’s anticipated arrival at New Bailey, Lewis added. His forecast is significantly below the 1.45m sq ft of city centre office space occupiers leased in 2019, according to the Manchester Office Agents Forum.
A total of 58 office lettings equating to 306,000 sq ft were signed in the first three months of 2020, the latest MOAF figures showed in April.
Landlords will have to compromise to attract tenants in the wake of the pandemic, and they may have to accept shorter lease lengths. “The days of landlords sitting there waiting for long leases are gone, now even five years is a long time,” Lewis told Place North West. “They are going to have to change the way they work with tenants.”
Chris Cheap, Manchester-based managing director of UK regions at Avison Young, said occupier sentiment had been good prior to the pandemic, and the “hardwired resilience” of the Manchester market would allow it to bounce back from the effects of the global health crisis.
“We were in a very strong position in Q1, above the five-year quarterly average,” he said. “There was massive upward pressure on rent and we were on course to hit £40/ sq ft. There is inevitably going to be a significant drop-off in the short term, while businesses are in survival mode, but that can’t last forever.”
Manchester achieved city centre office rents of up to £36/ sq ft in 2019, according to Savills. Going forward, office occupiers are likely to decrease their sq ft requirements, pushing up prices, Cheap noted.
“We are in a good position and unless we see a lot of large occupiers dumping space into the market, we aren’t going to be flooded with grade A office space, which would create negative tension and cause downward pressure on rental levels and upwards pressure on incentive packages.”
Mark Canning, director at Canning O’Neill, agreed that activity would slow but Manchester was well placed to bounce back. “I am positive about the next 12 months, so long as there’s not a second wave [of the virus],” he said.
“Business is still happening, we’re doing deals and we’re busy but this year will be slower with regards take-up. Our [agency] income will reduce but hopefully not to a significant degree.” The June quarter day will be a telling indication of the state of the office rental market, Canning said.
We are now set up to undertake property viewings.
We have ensured the team are fully up-to-date with the government’s latest guidance and have added additional measures to our internal viewing protocol book. This will ensure the safety of the individuals undertaking viewings. pic.twitter.com/t2QWL2CCsd
— OBI (@OBIProperty) May 18, 2020
The Government’s decision to re-allow physical viewings is a big step forward for agents in general, who said they have noticed shifting responses among occupiers in terms of the type of space they want post-pandemic.
“One firm is looking to take 60% more space, and we are getting interest from businesses who worked in co-working facilities that are now looking at being in a more private environment,” OBI’s Lewis said.
Many occupiers are taking stock of current circumstances and those that were planning aggressive expansion strategies may be trying to consolidate space instead, according to Nick Nelson, director at Sixteen.
However, a widespread exodus from office space is unlikely, as occupiers are at the mercy of their contracts. “Deals are driven by expiry dates or lease breaks, and fundamentally that doesn’t change,” Nelson said. “Those who want to downsize will find it difficult because they can’t just walk away from lease liabilities.”
Certain contractual clauses and the possibility of sustained rent-free periods will likely become commonplace in future leasing deals, he added.
- Market could register an uptick in take-up by Q3 2020
- Co-working sector could continue to struggle in the city
- Occupiers will explore a range of lease options to increase flexibility
- City centre will continue to suffer from lack of grade A office space
The lockdown imposed at the end of March had an impact on overall leasing figures for Liverpool offices in Q1, according to Avison Young, with the total amount of space transacted standing at 50,000 sq ft, 50% below the ten-year quarterly average of 103,000 sq ft.
Avison Young’s report, published in April, said: “Occupational demand has significantly diminished since Covid-19 put the UK on lockdown and this is expected to have a substantial impact on deals in Q2 and Q3 of 2020.”
Ian Steele, principal at Avison Young, told Place North West: “A lot of occupiers are adopting a more cautious, wait-and-see approach, which will result in deals being delayed or put on hold.”
However, many Liverpool-based agents, including Steele, reported a slight pick-up in leasing activity in recent weeks after an initial drop-off earlier in the year. Andrew Owen, partner at Worthington Owen, said his confidence is growing after he noticed an upturn in enquiries from potential clients.
“Liverpool has been extremely quiet over the last seven or eight weeks and there has been very, very little activity in the market. But I’ve had the sense over this week and last that things are starting to warm up again,” he said.
Having received a call from a client looking to downsize, he said he also believes that many companies will review their office requirements following the rise in remote working during lockdown. “The pandemic might exacerbate a change in business model with regard agile working, and you might see occupiers looking to reduce space.”
Liverpool continues to suffer a dearth of prime office space, Owen added, citing a combined 33,000 sq ft at No.4 St Paul’s, Chapel Street and The Plaza as the best space currently available. However, demand for shorter leases is likely to increase as occupiers seek greater flexibility in an uncertain economy, causing headline rents to rise to bridge the gap, according to Avison Young’s Steele.
Like Owen, Steele reported seeing an increase in market activity over the last couple of weeks and predicted that this could be reflected in higher overall deal volumes towards the end of Q3. For now, though, “insurmountable physical barriers” presented by the need to social distance will have a significant subduing impact on the office market.
“Occupiers may delay decision making and review negotiations with landlords,” Steele said. “They may look to reduce the amount of space they commit to, or ask for options for additional space or to take a shorter-term lease, a lease with breaks in it or look to reduce the headline rent altogether.”
David Topham, chief executive at CTP, which is delivering offices at Pall Mall in joint venture with Kier Property, said he remained “optimistic and positive about the role of offices going forward”, but that some aspects of office developments, such as air quality, would become more important to occupiers in the wake of the pandemic.
“How offices are used in the future is going to change,” he said. “We are moving away from mass-desking and more to places where people meet and collaborate to do task-based work.”
Owen, whose firm is the joint agent on Pall Mall, said the future of the co-working sector is uncertain. “The reality is that [it] appears to have struggled in Liverpool and I wonder if the current circumstances might be the death knoll for a number of these operators in the city centre. I very much hope not.
“I have also heard the opposite, though, that you might see more occupiers gravitate towards co-working because it offers flexibility on location.”
Steele concluded that people and social interaction were “central to most businesses”, and predicted a change in office culture rather than the death of the office as a whole.