The Impact of the Coronavirus: Offices
What impact has coronavirus left on the offices sector and what should landlords and investors take into account for their future strategies?
We’ve put together some valuable insights from across EMEA, and the latest learnings from APAC.
Lessons From APAC
- While the timing of a recovery in Europe remains uncertain, the positive news from our APAC teams – which are some 6-8 weeks ahead of the European curve – is that they are seeing light at the end of the tunnel
- Mobility restrictions remain in place across markets, but staff are gradually returning to work as the region emerges from the ‘lockdown’ phase. Certain sectors – IT, digital tech (on-line gaming and entertainment), life sciences and FMCG – are witnessing a pick-up in activity in China. There is now cautious optimism APAC for a ‘V-shaped’ economic recovery in H2 2020.
- Occupier sentiment has been strong from a domestic perspective, but internationally, it is hesitant until the situation in North America and Europe becomes clearer. The biggest question mark for the APAC markets is how quickly Europe and North America will recover, allowing international multinational corporations (MNCs) to release the handbrake on their decision making.
How is Occupier Activity Changing across EMEA?
- More and more occupiers have begun negotiating rental incentives, rent-free periods and earlier contractual breaks. For most advisors, the key objective is to maintain open dialogue with clients on assignments, especially where the business cash flow position is difficult. Some renegotiations that can be handled by video-conferencing are ongoing, but almost all new projects are being pushed into a ‘wait-and-see’ holding pattern.
- On a more positive note, some companies continue with their leasing activity, including government bodies, NGOs, shared service centres and life science companies.
- Companies that are still actively signing are not taking long-term obligations – three years seems to be the lease length being adopted until economic results are clearer.
- It is worth remembering that good assets and leases are hard to come by – scenario analysis of changing demand vs supply side conditions by Colliers International points to this.
- Landlords, for the most part, have had to accept the extremity of the current climate and accept rent deferment or rent-free periods in order to preserve occupier relationships. Landlords negotiating new leasing deals have begun to offer more flexible leasing models, allowing for shorter-term commitments in order to secure occupancy
- Institutional landlords – REITs, Insurance, Pension and Sovereign Wealth Funds – are particularly keen on preserving face/passing rents to preserve values, given the extreme volatility in financial markets. We expect to see some more innovative rental and leasing incentives as the situation unfolds.
- Looking forward, the transition from desk-based working to remote working has instigated many businesses to re-evaluate their mid-to-long term business and operating strategies.
- If businesses can perform just as well remotely, the volume and type of active space required will change and so too will business overheads and margins. The adoption of flexible space and leases are likely to become more embedded into occupational strategies.
- Renegotiations and disposals are very likely to increase in future.
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Market Context
The office market started 2020 in a very strong position for landlords.
A significant number of EMEA locations, 59% in total, were reporting landlord friendly market conditions as of end Q4 19, up from 52% a year earlier.
This is reflected in the very low vacancy rates and limited pipelines, minimising forward-looking availability levels. Pre-COVID-19, the expectation for the year ahead was that this position would be maintained, supporting rental growth/stability, although some landlord-friendly markets may switch to a neutral position as demand-side conditions – economic and employment growth – contract.
Flexible Workspace
The ability for firms to manage through a period of flexible working is coming under a major stress test, in what is the world’s biggest ever remote working experiment.
The rapid adoption of technology in the last decade and the use of remote devices and video conferencing should enable the majority of companies to function effectively, at least short-term.
Yet, the need to minimise social distancing and contain any spread of infection is likely to embed a constant need for flexible working in future and spur changes in how whole business teams are set up.
Co-location and decentralised location planning may well move up the corporate agenda in future, allowing larger companies to better manage business disruption in future, rather than face the closure of one centralised office for all staff.
The adoption of independently operated, flexible workspace is also going to face its toughest market test.
The greatest pressure must be on operators reliant on local SMEs, on short-term contracts to pay the rent. The gig economy is going to be under extreme pressure in the next quarter at least, and many smaller independent operators may not have the cash-buffers to honour their master lease or mortgage commitments.
Working amongst a bunch of relative strangers is a very exposed business model under current circumstances.
That said, flexible workspace operators with larger corporate clients, and who have robust sanitisation/crisis management and communication operations in place may even benefit
– from both short-demand from specific project teams, and as mid-long term demand grows on the back of the need to decentralise some corporate operations.
Occupiers by Sector
Businesses most exposed to a short-term economic shock will undoubtedly include airlines, tour/holiday operators, events, music, sports and art based entertainment companies.
If we consider the major office-based occupier groupings that drive city economies, the short-mid term hit from the current downturn is most likely in the finance, banking and insurance sectors, and potentially the real estate sector – both of which are dependent on transactional activity to maintain revenues and output.
Cities heavily exposed to these sectors (in yellow, below) may see office demand come under negative pressure.
Conversely, sectors highlighted in green include the scientific and professional services which may see demand for their services expand.
The public services/administration and back-office support services should remain stable throughout, and again we can see difference by market.
Market Outlook
Even under some significant market stress-testing, the vast majority of EMEA office markets look set to maintain low vacancy rates.
Despite a drop-off in absorption resulting from economic/employment contraction, office pipeline activity is also stalling which will serve to maintain a supply-demand balance.
Those markets showing the biggest outward movement from vacancy rates posted at end 2019, tend to be locations that had already seen vacancy move out in 2019, as the supply-side expanded via new completions.
The exposure of markets to certain business sectors will further impact vacancy levels, but on the whole the pressure on rents mid-term looks limited.
The analysis has been prepared by Colliers International.
Last updated: 23 March 2020.
Disclaimer: The analysis and findings reported in this article is based primarily on Colliers International data, which may be helpful in anticipating trends in the property sector. However, no warranty is given as to the accuracy of, and no liability for negligence is accepted in relation to, the forecasts, figures or conclusions contained in this report and they must not be relied on for investment or any other purposes. The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a “Global Pandemic” on the 11th March 2020, has impacted market activity in many sectors, creating an unprecedented set of circumstances on which to base a judgement. This report does not constitute and must not be treated as investment or valuation advice or an offer to buy or sell property. Given the unknown future impact that COVID-19 might have on real estate market supply, demand and pricing variables, it is recommended that you recognise that the research and analysis above are far more prone to market uncertainty, despite our endeavours to maintain our robust and objective reporting.
