2:2:1, 3:1:1, or 5:0:0: The right formation for the return to the office; and the rise of the retail partnership

Euro 2020 is underway, a year late due to Covid-19. As Gareth Southgate considers whether to play a diamond formation in the middle of the park, or commit to attacking wing backs, one question that may play on his tactical mind, is how many days should he be spending in his office at Wembley Stadium when the Euros end. Should the week be carved up into two days at the office, two days at home and one flex day (as we are Memery Crystal are likely to follow), or more or less days working in one or other location?

Many views abound as to the best strategy, coupling staff welfare, productivity and the best return on investment for the rent paid for central city office space.

As one example, Facebook has now gone public and confirmed that employees can work permanently from anywhere, BUT that they may be paid less if they move to a cheaper area. Location adjusted salaries may well be just one unintended consequence of greater freedom of work choice, as could be a loss of culture and oversight (important especially for banks and regulated businesses). This is a tricky balance for all businesses and one that seems not to have consistency of approach even within the same industries. On the other hand, Apple employees will be asked to return to the office minimum 3 days per week from early September, according to a leaked memo. Other major employers think that WFH is a fad, such as Goldman Sachs CEO David Solomon who notably has said that working from home was “not a new normal” for the investment banking giant, calling it an “aberration”.

The BBC recently reported that an immediate return to 3-4 days in the office was likely for many businesses, returning over the longer term to the pre-pandemic 5 days per week. Certainly any increase in unemployment levels could bring personnel back to their offices, seeking visibility and comfort as to their positions.

As we approach the end of the “work from home if you can” directive from the government and (hopefully) the end of the final Covid restrictions, businesses will start to implement the strategies that they have been working on over the past months to bring their staff back to their offices. A move to downsizing may begin, although many may still take their time to test the water with all staff back in the office before making big decisions. Lease obligations and the strength of the leasing market for sub-lettings or assignments will also be a factor.

UPDATE: Leaked UK government documents, prepared ahead of the lockdown easing rescheduled for 19 July, suggest that working from home will still be encouraged, and offices will be required to meet new workplace ventilation standards. We may have to wait a little while longer until a full and unregulated re-opening …

There have undoubtedly been benefits to WFH. One study put general illness days taken off by employees to near 0% from a previous level of 7%-8% prior to the pandemic. Others say WFH will always be less productive than in the office and that the office creates benefits home cannot replicate. It is designed for maximum efficiency and output, so (commute aside) that should be no surprise. As one commentator put it, there is no need to battle the main enemies of being at home during the week – the bed, the fridge and the TV!

What is beyond doubt is that WFH is not as unproductive as used to be, due to the innovation and the technological tools available through high-speed internet, cloud technology and video technology. In this respect only it was a “good time for a pandemic”, compared to say 30 years ago, when few businesses could have continued in the same way without major disruption.

For real estate, there is expected to be a bounce as the economy opens up says John Gray, Blackstone Group President and COO in the context of the United States. He cited inflationary pressures as one factor that may help existing buildings, with new construction being more expensive as a result. Inflation is very much on watch here as well, with news that the UK economy grew by 2.3% in April, its best performance since July 2020, as outdoor hospitality and non-essential shops reopened, official figures have revealed.

Some positive signs are already coming through as Estates Gazette reports that Snapchat is planning to open a new London office in Farringdon (following Tick Tock doing similar earlier this year), as the tech giant targets a significant expansion of its UK workspace. Parent company Snap Inc is in talks to take 114,000 sq. ft. of office space at developer HB Reavis’ flagship new building called Bloom.

One commentator suggested that there will be more office space, only it will be located in homes. If companies pay their workers more, then they pay less for a centralised office, but more for workers to rent their own, as they wish. Perhaps a somewhat tenuous argument, perhaps from the investor perspective in particular, but it does raise questions as to where we work, how we value housing and how we view the necessity of commuting. The key question remains – how much space does each business need and where should it be located? Are satellite offices the answer and will they work for small and medium offices, particularly where collaboration is required and people are not living in the same locality.  How far from the office can your staff move?

Despite the devastating effect on office use during the pandemic and the proven enforced reliance on home working, other industry leaders believe that WFH is a fad – see this recent Times interview with Canary Wharf head George Iacobescu, where they quoted the following:-

“Working from home is a fad,” he declares. “No question, it was very good in times of Covid. But we should be careful that it doesn’t become a permanent feature of life, because this is not the way cities have developed. There is a logic to having an office. There is a culture, there is competition, there is creativity, there is dating, there is learning, there is education. We’re all chemically made to be together. We’re moulded by science or God to be together, to work together.”

He naturally has an interest in taking this view, with the article outlining the effect on his own company’s interests and the pandemic has hit hard the Canary Wharf empire of 51 buildings sprawling over 18m sq. ft.:-

The pandemic has placed a question mark over the future of Canary Wharf, already shaken by Brexit and the 2008 crisis. A fraction of the 120,000 workers who previously commuted in daily and the 950 people who live there can be seen on the streets. Just 2 per cent of Canary Wharf’s 300 retail units are vacant, down from 8 per cent at the peak of the virus. Yet while Bloomberg and Goldman Sachs, both in the City, have been keen to get staff back into offices, many of Canary Wharf’s big tenants have been more muted.

A continuation of less central office occupation will cause rents to fall significantly (if they haven’t already) and a reduction of tax from offices will put a strain on the finances of cities across the globe. Estates Gazette reported this week that between just the FTSE 350 listed real estate companies, they have lost close to £7bn as a result of Covid-19, with a whopping £8bn wiped off the value of their portfolios.

Conversely businesses will have to be careful how they organise their return to the office programmes, with  The Times also reporting that a significant minority of staff at some businesses are reluctant to return to the office at all, having proved throughout successive lockdowns that they can do their job perfectly well from home and claiming constructive dismissal if they are forced to return to an office place that they previously commuted to daily. An argument that is likely to fail in most cases where their employment contracts do not expressly allow them to.

The unwinding of furlough is due to start at the end of this month when the scheme will drop from 80% to 70% of wages, with employers contributing 10 per cent as part of a “tapered” withdrawal of the scheme. This will further complicate matters, with the task of re-integrating or otherwise managing the return of workers not seen for 18 months. Business rates relief for retail, hospitality and leisure is due to fall from 100% to 66% on 1^st July, although it will remain in place until March 2022.

What type of office space will returning employees want and expect? The previous go to for modern design had to be open plan – the assumed preference of ‘Millennials’ and the modern look to attract new talent. Would those same assumptions apply, or does a cellular office with improved ventilation and a controllable climate that does not share air with others be  preferable. This may avoid potential illness from again collecting together in offices. Moreover, will businesses pay for new fit-out and enhanced space, when offices are only likely to be occupied two or three days a week by most of their staff?

The housing market on the other hand has been red hot for some time now as people scramble to access gardens and suitable working space. This will carry on at least until the end of June, when the Stamp Duty Land Tax exemptions halve. House prices rose in May at their fastest pace in seven years and climbed by 9.5% in the year to then. Demand has been supported by the Bank of England’s decision to cut interest rates to a record low of 0.1 per cent and the government’s introduction of a stamp duty holiday on the first £500,000 of a home’s cost. The residential property team at Memery Crystal have been going full steam for many months now as prospective buyers look to beat the increase and upsize to match their new increased home-based lifestyles. Economists expect that the market will lose momentum as the end of stamp duty relief approaches.

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I recently moderated a fascinating Bisnow panel discussion titled “Landlord and Tenant Engagement: Harnessing the Bounceback and Building for the Future” with representatives from some of the top Real Estate retail companies in the UK, including Legal & General, Grosvenor, Shaftesbury, Cain, Re-Leased and Lorenz. You can watch a re-run of it here.

Their views on turnover leases and co-operation, as well as managing the environment to best suit retail occupiers was intriguing. We discussed the full range of approaches, from some that have been tense and adversarial, invoking the remaining legal tools available to landlords (we at MC have been instructed to issue numerous CCJs to recover unpaid rent) and more interestingly where landlords and tenants have collaborated and partnered with each other to their mutual benefit. Other deals were done in a more traditional way, with break clauses being removed or leases extended in return for rent indulgence.

A number of landlords took the opportunity to learn in detail about their tenants’ businesses and worked with them to ensure survival through the non-trading lockdowns. Julia Wilkinson of Shaftesbury suggest that a flexible partnership model was key to them. Many landlords found that turnover leases in particular proved an apt pandemic structure, allowing retail occupiers to naturally benefit from baked in rent reductions, whilst landlords still collected a base rent and expect to join in the upside of the post-unlocking success that those businesses are mostly enjoying now.

There were initiatives to assist with negotiating rates holiday claims with the local councils, with collective PR and marketing and even investments into the retailers directly, using their balance sheets to prop up otherwise successful businesses. Grosvenor launched its Tenant Investment Fund, taking equity stakes in occupiers on its estate, such as Atis, enabling the business to grow during the pandemic. Others also emphasised a true partnership with their tenants, suggesting that less flexibility for tenants meant that they were less likely to pay. Denizer Ibrahim of L&G commented that the current rent structures were broken and that this was a real opportunity to re-think the traditional relationship, requiring flexible partnerships between landlords and tenants. Tom Bates at Cain noted that up and down rent review structures were likely and that new rent structures were needed.

This collaboration is undoubtedly needed. Oxford Street retail void rates have risen to 17% as a result of the rise of online shopping and the fallout from the Covid-19 pandemic, a Property Week investigation has found.

Given that the government has now extended the moratorium on recovery of commercial rents until March next year, and is introducing a mandatory arbitration process to tackle debts where landlords and tenants cannot agree, this co-operation will be further tested and become even more important if both sides are to weather the storm through to its end.

For more Memery Crystal commentary, my colleague Ben Shore recently wrote an article, discussing the future of the shopping centre and looking at different lease structures in the context of alternative destinations and the landlord’s influence on driving footfall.

In the meantime, inflation creeping up is being monitored by economists and any increase in interest rates may be reflective of any surge.

Much is still evolving and being understood, but in the meantime – is it coming home? Come on England!!