Have we seen the end of the office market as we know it?
Will Bryant, PERE counsel at Ropes & Gray, considers the likely fallout of Covid-19 on the office market…
There is little doubt that, in the immediate fall-out of this pandemic crisis, office working as we know it will have completely changed.
From a practical perspective, even in larger, more traditional offices, social distancing in the previous environment would be nigh on impossible and there are then the obvious challenges faced by offices with denser occupancy models, such as co-working in its current form.
Business occupiers also have important cost-saving considerations to address in light of reduced trading and potentially disastrous revenue falls. Property costs will no doubt be a glaring example of one area where efficiencies may be achieved, all the more so given the seamless transition to remote working for so many businesses.
Many business leaders have in fact reported being more connected to their workforce than ever, given the need to proactively 'meet' remotely for sustained periods each day, as opposed to the previous culture of popping to the office round the corner, where necessary.
It remains to be seen how the relevant governmental and industry task forces will address the inevitable concerns, but what is clear is that we are in for a substantial wait until we have a clear view on how office investment and occupational markets have been impacted. Valuations in the near-mid-term will be very difficult to gauge amidst such uncertainty of underlying appetite.
However, to harbour a pessimistic outlook for the sector in perpetuity is probably short-termist and forgetful of the intrinsic social nature of humans. The physical office environment has always afforded us that true, eye-to-eye personal connection, with colleagues and counterparties alike, that facilitates successful business transactions in a way that its virtual format cannot. Many will also be mindful of the burgeoning use of PropTech which will surely be instrumental in addressing some of the coming challenges of office working under new regulations.
With these thoughts in mind, it seems prudent to assume that offices will continue to offer great benefit to businesses, when the dust eventually settles. Investors who take a long-term view on the sector and are ready when it does may therefore reap the rewards.
In the meantime, the FT has approached a number of high profile business and property executives for their views on the sector as it stands. They are varied in their responses from the bearish, to the realistic, through to the bullish – perhaps the latter will win out when we find out what the new normal really is…