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Office Occupier Decision Making

Ben Cullen • 24/03/2020
Only two weeks ago, I met with the CEO of a large London occupier who was looking for new office space in London. He was disappointed by the limited choice of options, surprised by the long lead-in to secure a pre-let and outraged by the increasing rents. 

Today, I expect that this office project is very low down his list of priorities as he fights, like most organisations, to understand what COVID-19 means for his business.

It’s clear, that for all but a small number of office occupiers close to committing to new premises, they will wish to take time to understand the implications of COVID-19 for their occupational requirements.

It is too early to conclude with any certainty what will happen to occupier demand over the next few months, but I can share some early observations:

Timing is everything

The response to many of our occupier clients over the past few days has been dependent on the urgency of their project. Occupiers with a pressing need for new space (an imminent break or lease expiry) are faced with two choices; should they continue to legal completion but risk delay with fit-out and possible disruption if they can’t move-in on time, or, pivot towards a lease extension which may help in the short-term but not be desirable longer-term. For investors with tenants or potential tenants in this situation, the advice must be to ‘engage and get creative’. 

Conversely, for occupiers with longer lead-ins there is less pressure. Some will wait to see if the market softens, others are intent on progressing negotiations but will probably pause for breath at the point of signature. 

At this stage, I see the possibility of a 2-tier rental market, where there is softening of financial packages, for up, built and available space (including lease re-gears) but a relatively stable market for longer lead-in pre-lets, where investors don’t have to chase the market and can afford to wait out this period of uncertainty.

Good news from the tech sector

Even the most entrenched luddites look set to rely heavily on the cloud, the web and digital communications over the next few weeks. 

Therefore, it’s perhaps of no surprise, that the tech occupiers which have driven take-up in London over the past few years, remain confident. While market-facing demand for new office space may experience a temporary fall, it seems that head-count growth in this sector will continue. One occupier I spoke with earlier today explained a virtual recruitment process which will enable ‘application to on-boarding’, all done remotely, and with hardware sent to the new employee’s home!

Short-term pain, but a quicker recovery?

There is already some talk in the market about COVID-19 sending the serviced office market into free-fall. Yes, some of the weaker operating models may collapse and all providers will experience a sharp fall in new applicants and renewals. However, I think many operators are more resilient than some commentators predict. 

The larger players have focussed on long-term corporate contracts that will likely bridge this crisis. Smaller business contracts may fall away leading to vacancy, but I expect this capacity will be a valuable resource when our economy revives and occupiers look to unravel delayed projects and missed lease events. 

What next?

Expect limited occupier activity over the next few weeks as all organisations scramble to adjust to a new business environment. However, be prepared for intense engagement that will follow this hiatus. As a significant business over-head, office occupiers large and small will need creative thinking from the landlord community to help them weather this unexpected crisis. As always, there will be opportunities for those that do so successfully.

 
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