8 June, 2021

Now that working from home is a viable strategy for many businesses it’s going to take an exceptional workplace to get us all back into the office. That makes the challenge even tougher for landlords of Grade B space. So how is it possible to reposition older or second-hand space to make it stand out in a competitive market, and can new flexibility in the planning rules offer an unexpected way to create value?

The future of the workplace is second-hand social cardThe market for Grade B space has been under mounting pressure over the last few years. Already facing serious competition from the growing co-working sector, institutional landlords had begun to respond by offering their own version of fitted space, available on more flexible lease terms. Focussing on space that was more challenging to let, these landlords were able to attract a range of small, fast growing, start-up businesses that were sufficiently established to want their own addresses. This allowed landlords to generate income from troublesome space and diversify their own space offering. Everyone was winning. This broader competition meant that many different solutions started to come to the market, each one carefully structured to meet the needs of both occupiers and investors. Then COVID 19 happened.

Over the last 15 months it’s been a revelation to see how quickly those able to work from home adjusted to the challenge. It’s certainly not perfect for everyone but it looks like it’s here to stay, at least as part of a hybrid work pattern that sees employee time split between home and the workplace. As the economy starts powering up again and our confidence grows, what now for the burgeoning second-hand space market? It’s clear that working from home will be a key feature in many office-based property decisions. We know that staff can be trusted to work in individual environments. We know that IT systems can support them, and we’ve got our heads round the new reality of hybrid meetings. For all the positives though, we still desperately miss the experience of real face-to-face interaction and collaboration. It’s the spark that generates new ideas and makes us creative. The office then, is by no means dead.

Accommodating hybrid working is a tough ask for the secondary market that’s already under pressure. Arguably, however, it’s better positioned to be experimental in the way it re-invents itself. It isn’t faced with the constant pressure to deliver top rents like Grade A space and consequently it’s able to take a few more risks. In fact, it’s likely the Grade A pipeline will be watching closely to see how the market reacts to new hybrid working solutions. The core principles will be the same as they’ve always been for the secondary market – embrace change and innovate. Make sure any space put to the market is a great place to be, and design it to accommodate all the activities occupiers want to carry out there – with a real focus on what home working can’t do, allow us to meet, collaborate, socialise and co-ordinate.

This will bring its own challenges – not least of which is finding a way to handle the fluctuating occupation densities that are the hallmark of hybrid working. Occupiers are looking for more than just vanilla office space now. Workstations on their own won’t be enough to attract people to leave home. The perennial chatter about improving the occupier experience has increased in volume. Second-hand space has its work cut out to provide this facility-rich experience. It’s not just a question of cost. The buildings that need this transformation come in all shapes and sizes, and in many different settings. That might turn out to be an advantage because changes to the planning laws could well give Grade B space the opportunity it needs to decompress.

A new Use Class E was introduced in September last year. This allows commercial buildings to be used for a flexible range of activities, even allowing them to switch from one use to another at different times of the day. Combining leisure and business in a single use category represents a real opportunity for asset managers to be more creative and turn their assets into income-producing destinations which can provide the flexible space occupiers are demanding. We expect to see a combination of higher quality retail and leisure uses in the lower parts of existing buildings to encourage improved footfall from the public, and crucially to attract the best talent for the office space above. Who knows where this could lead, fitness studios during business hours, converted to provide more restaurant covers in the evenings?

How these operations will end up being created and carved up is yet to be established – but we can be certain that distressed Grade B commercial offices will be the test bed for a market pivoting towards hospitality more than ever before.