Work-from-Home Unleashes Nightmare for Office Landlords & Surrounding Businesses. Global Banks at the Forefrontby Nick Corbishley • Jul 22, 2020 • 49 Comments
“There will be a long-term adjustment in how we think about our location strategy…the notion of putting 7,000 people in a building may be a thing of the past”: Barclays CEO. And companies are following through.By Nick Corbishley, for WOLF STREET:This appears to be an increasingly global phenomenon. Roughly 60% of bank executives in the US said they don’t expect all of their employees to return to the office. And over 40% said they plan to reduce their real estate footprint in response to the coronavirus pandemic, according to a survey of US bank executives by Accenture Plc.
Some banks are already making long-term changes. In Midtown Manhattan, French megabank BNP Paribas renewed its lease at the 787 Seventh Avenue tower. But it shrank its footprint by 38%: According to the Commercial Observer, instead of renewing the lease for the 454,200 it currently occupies at the building, it signed a lease for only 280,000 square feet.
In London, large financial institutions are the biggest tenants of the toniest commercial real estate. And they are now seriously reevaluating not only how much workspace they require but what sort of form it should take. Even allowing for physical distancing measures, such as the separation of desks, most companies now have a lot more office space than they think they’ll need, especially if they end up laying off large numbers of workers when the government’s job retention scheme comes to an end, which is scheduled to happen in September.
Goldman Sachs and Nomura said over the weekend that they plan to send only 10% of their UK workforce back to their City of London offices.
Last week, the 30 biggest employers in the City of London said they only intend to bring 20-40% of their workforce back in the coming months.
One of the UK’s “Big Four” banks, RBS (which was renamed “Natwest” today in yet another re-branding exercise for the scandal-tarnished lender) announced that close to 50,000 of its 63,000 workers will continue working from home, at least for the rest of this year.
“Like we’ve done throughout the pandemic the decision has been made carefully, including considering the latest guidance from the UK Government on Friday and our own health and safety standards and procedures,” said a spokesman for RBS. “It’s a cautious approach but we feel the right one to take currently.”
“Work from home if you can.” That was the blanket message the UK government sent out to all non-essential workers during the darkest days of the Covid-induced lockdown. Now that the lockdown is easing, the government is frantically trying to reverse the trend toward working from home, which it itself set in motion and which is unleashing myriad negative impacts across the economy. It has even relaxed the safe distance rules from two meters to “one-meter plus.”
That the British government can’t even persuade RBS — which is still 63% owned by the British State following the bailout during the Financial Crisis — to get its workers back into the office does not augur well for its efforts to halt or reverse the trend toward home working.
By now, 49% of all UK workers are working from home, up from 5% just before the lockdown. With the novel coronavirus still doing the rounds, many of them are skittish about venturing back into the office. Some seem to be quite happy toiling from the relative comfort of their own home and no longer having to commute.
Others are raring to get back behind their desks and away from their stultifying home-bound existence. According to a survey by global financial services firm Jefferies, 61% of more than 1,500 UK respondents said they would return to work immediately if they could.
As for their employers, many of them seem to be quite pleased with the results thus far of the mass remote working experiment, especially as they glimpse the possibility of saving millions in rent. Some startups have already got rid of their offices altogether.
Many companies are not just planning to pay less rent and reduce their office size, they’re also looking to move to buildings where they can better control the work environment and safeguard their employees’ health.
“There will be a long-term adjustment in how we think about our location strategy…the notion of putting 7,000 people in a building may be a thing of the past,” Barclays CEO Jes Staley said in late April, back in the early days of the UK’s lockdown. One possible solution under consideration is to move investment bankers and other back-office staff into branches, Staley said at the time.
The prospect of a mass exodus of large corporate tenants from landmark buildings terrifies major commercial property owners. It also worries their creditors, which, ironically, include big banks such as Barclays and RBS. According to public filings, the UK’s Big Four, which are rounded out by HSBC and Lloyds, had £49 billion in outstanding U.K. commercial real estate loans at the end of 2019.
The cracks are already beginning to show. According to the latest edition of CBRE’s Central London Office View, take up of new office space in Central London slumped to 1.1 million sq ft, a decline of 66% from the 10-year quarterly average. Availability continues to increase in the City as a whole, rising by 18% year-on-year in the second quarter, while the vacancy rate rose from 5.4% to 6.5%. In Central London, the vacancy rate rose to 5.3%, from 4.4% at the end of Q1, the highest level since 2010.
Non payment of rents is also on the rise. According to research by Remit Consulting, only 53% of office rents were paid on the June quarter day and 12% was still outstanding from the March quarter day. Ominously, large tenants are demanding concessions from their landlords more than smaller tenants.
As non-payment of rents rises and rental income slides, the value of the underlying properties will inevitably fall. The UK’s Treasury watchdog, the Office for Budget Responsibility (OBR), warned that the price of offices and commercial buildings could fall by as much as 14% this year while transactions are expected to slump by close to a quarter.
The whirlwind of the shift to work-from-home is hitting businesses such as cafes, restaurants, bars, hair salons, retailers, and the like, plus transportation and travel sectors that are dependent on these customers that used to work in offices. Now that many of those office workers are either opting or being forced to work from home, those businesses face a barren future, as do the owners of the real estate they occupy. By Nick Corbishley, for WOLF STREET.
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