French philosopher Voltaire once said: “the spirit of property doubles a man’s strength”. For centuries this has been the case, as real estate values have bounced back from periods of debt and despair. To this day, it has remained a cornerstone investment for family offices.
But, whisper it gently, the day has dawned to re-evaluate the sector’s status, as tech-driven tenants become increasingly wary of occupancy costs, and future space requirements. The changes are more subtle, but far more dangerous, than the sector’s history of boom and slump.
It has calculated that workers in London were each being allocated 98 square feet per office twenty years ago. The total has now fallen to 79 sq ft, a fall of roughly a fifth
Not even Voltaire could foresee the level of disruption which is now washing over the sector. In due course, it could undermine traditional upward-only rent reviews and long leases structures, replacing them with short-dated tenant licences like contracts issued by WeWork, Regus and Workspace. The best future for commercial assets could involve their conversion into residential property. Some will never be occupied again.
Developers are already pulling in their horns, as the digital revolution is speeding up a trend towards hot desking and working at home. Seaforth Land advises institutions and endowments on future needs. It has calculated that workers in London were each being allocated 98 square feet per office twenty years ago. The total has now fallen to 79 sq ft, a fall of roughly a fifth.
Seaforth chief executive Tyler Goodwin told the Financial Times the trend had accelerated following the Brexit vote and cost-saving measures: “The behaviour of the market has fundamentally changed over the last five years.”
The willingness of employees, particularly Millennials, to work away from the office, using a laptop as necessary, is helping to achieve change. The willingness of tenants to choose a funky space over a prime property is pronounced. In a separate survey, estate agent Savoy Stewart found a 16.3% fall in the available office space across England and Wales since 2012. The biggest 23.9% fall is in London, where rents, council tax and employee costs are high.
Savoy Stewart argues this is storing up space shortages developers fail to cater to future demand. Others say the lack of development reflects genuine uncertainty over the future, exacerbated by the uncertainty around Brexit.
The majority of agents agree the definition of prime office space is shrinking, as secondary office property goes under the hammer. Alan Carter, veteran broking analyst at Stifel says the change is subtle, but important. “It’s not forced sellers and it’s not a huge weight, but just a little loosening of what have been tight investment markets.”
Michael Prew, managing director at Jeffreys, the investment bank, has been casting a sceptical eye over real estate for years: “The relationship between jobs growth and London office take-up is no longer linear, he says, saying that faster transport and technology links are leading to a “death of distance.”
In January, he said the London leasing market had become overextended. The retail sector has been suffering worse than offices, given the acceleration of online sales, and problems are likely to deteriorate.
This year’s setbacks have seen a downturn spread from the High Street to large shopping centres, many of whose rents and values are steadily falling. Some secondary centres are impossible to shift.
Prew forecasts a fall in retail warehouse values of a fifth early this year. Shares in owners of real estate have halved in the last year, as tenants like William Hill demand rent cuts of 50%.
Brexit potentially offers a nasty sting in the tail to agricultural property, according to agents Savills, who anticipate a fall in values of nearly a fifth, as European Union subsidies drop away. This need not trouble overseas investors, but it will be distinctly upsetting for the UK landed gentry.