Average costs nudge downwards

Across the 54 surveyed locations, the average cost of occupying a new build office in the UK fell by 1.3% over the 12 months to June 2020. This is only the second time costs have fallen in the survey since the global financial crisis in 2008 and contrasts sharply with the 3.6% increase in costs in 2019. The fall was greater still for 20-year old buildings, down 1.6% over the year to June 2020.

Typically, of the 22 separate cost metrics, movements in headline rental levels and incentive packages form the main determinant of changing occupier costs from one year to the next. However, this was not the case in 2020. The main drivers for the overall drop in average costs consisted of other cost inputs, including furniture and insurance, while a host of other costs were flat or increased below inflation over the year to June 2020.

Impact on rents yet to materialise

While the fallout from COVID-19 severely impacted the UK economy during the first half of 2020, it was yet to be clearly reflected in average rental levels. The average net effective rent cost, which typically accounts for approximately 40% of total annual occupancy costs, actually increased by 0.8% in the year to June 2020, compared with 0.1% average growth recorded in the preceding year. Similarly, average net effective rents increased by 1.0% for 20-year old buildings across the 54 surveyed locations.

This is not to say that rental levels will not be impacted in due course. Businesses’ priorities are, at the time of writing, focused on securing income and managing their workforces through this challenging period. Consequently, there is likely to be a lag between the wider economic impacts from COVID-19 and rental impacts, and the amount of surplus tenant space, or ‘grey space’, that comes back to the market will be a key factor in the rental adjustment in any given location.

Oxford sees strongest cost increase

While total costs fell slightly on an average basis, there were notable contrasts between specific locations. With regard to new buildings, only three of the 54 surveyed locations saw growth in excess of 2% over the past year. Oxford saw the sharpest increase, with occupier costs rising by 6.4%, followed by Manchester (3.9%) and Cambridge (2.4%).

In each of the above cases, upward shifts in prime rents were at the root of the overall increases in cost. In Oxford, the arrival of the Jam Factory, a high quality refurbishment in the city centre, propelled prime new-build rents to a new high of £47.50 per sq ft in 2020, a jump of 19% on the previous level.

Meanwhile, at the other end of the scale, five locations saw total occupier costs in new buildings slip by over 4% over the year to June 2020. Notably, the main fallers were all located within Central and West London, with downward movements driven by a softening in headline rents and/or rent free incentive packages due to a relative abundance of supply.

West End’s relative cost premium continues to erode

The prime core of London’s West End remains by far the UK’s most expensive office location, with the annual cost for a new office in Mayfair standing at £18,877 per workstation, 139% above the UK average and 58% ahead of next most expensive location, the City of London.

That said, for a fourth successive year, the latest survey reveals that the gap in costs between the UK’s principal regional cities and central London has narrowed from an all-time high in 2016. This reflects the continuation of rental growth in the UK’s major regional cities, alongside relatively stable rents in the capital.

By way of illustration, the average cost of a typical workstation across the ‘big six’ cities - comprising Birmingham, Leeds, Bristol, Manchester, Edinburgh and Glasgow - stands 38% below London’s Midtown district, narrowing from a peak of 44% in 2016’s survey. Nonetheless, the cost appeal of the regional cities over central London remains strong; prior to the global financial crisis in 2008, the discount was only 25%.

Meanwhile, this year’s survey also reveals that Cambridge remains the UK’s most expensive location outside London, having moved ahead of Maidenhead in 2019. The renowned university city has seen several successive years of strong rental growth, with annual costs in a prime new building amounting to £9,350 per workstation.

Occupier costs are cheaper in real terms, long term

Taking a longer-term view, the movement in average occupier costs has not kept pace with inflation over the past decade, meaning costs have actually fallen in real terms. Since 2008, average consumer prices have increased by 28%, whilst average occupier costs for new buildings have increased by only 18%. Evidently, as the market moves into a period of possible contraction on the back of COVID-19, the effects of the global financial crisis in 2008 continue to loom large.

At the time of writing, COVID-19’s impact on occupancy costs is yet to be seen. In the near term, occupancy costs for buildings both new and old may reduce on the back of lower demand, reflecting reduced headcounts and surplus tenant space hitting the market. However, with greater acceptance of flexible working post lockdown, a growing occupier focus on quality over quantity in the future indicates that cost reductions will be most clearly seen for older, secondary office buildings.

Significant reform to Atkins’ workspace strategy over the past decade has been key to its operational resilience amid the COVID-19 pandemic. While Atkins has coped with the recent challenges, what could the experience mean for the future of the office?

Significant reform to Atkins’ workspace strategy over the past decade has been key to its operational resilience amid the COVID-19 pandemic. While Atkins has coped with the recent challenges, what could the experience mean for the future of the office?

In this special guest written article, Denise Burgess, Corporate Real Estate & Workplace Services (CREWS) Director for UK and Europe at Atkins and SNC Lavalin, discusses the implementation of its workspace strategy and offers her unique perspective on what the future may hold.

Building a high quality workplace

As with so much of the services sector, the global financial crisis of 2008 was an extremely challenging period for us. However, the events set in motion a new direction in our strategic use of office space around the UK. Now, over a decade on, we face a new set of challenges, as we seek to navigate the disruption from the COVID-19 pandemic. Thankfully, as the crisis unfolded, the advances in our working practices over past decade put the business in a resilient position.

Rising to the challenge

Back in 2008, at the height of the financial crisis, Atkins’ UK network of office space was not representative of one of the world’s most respected design, engineering and project management consultancies. The challenge was, in essence, to propel Atkins’ UK workspace into the 21^st Century. The push for change was threefold; to improve the quality of our workspace, empower our employees to work more flexibly and to meet our targets on sustainability.

The journey has not always been easy, but we are proud of the progress we have made in delivering on these goals, while maintaining cost effectiveness at all times. In the space of the last 12 years, Atkins has delivered the following headline improvements in its operational estate:

• 48% of UK workspace classed as ‘very good or good’ quality in 2019, up from 20% in 2008.  We’re improving but still have a long way to go!
• 38% reduction in total UK-wide floorspace since 2008, amid a 5% expansion of UK headcount.
• £45m of capex invested into workspace improvements over this period.
• 12% real terms reduction in property costs including capex spend since 2008. 

Instilling flexibility. Empowering staff choice

Instilling flexibility into our working practices has been pivotal to this journey. Analysis from the research we undertook back in 2008 revealed huge scope for driving greater efficiency in our use of space. Then, individual desks were allocated to staff with under 50% typically UTILISED at any given time, whereas pre-COVID this increased to over 90% in our more agile offices. Our AGILITY has significantly shifted from a 1:1 desk to head count ratio down to an average of 80%, and less than 60% in our flagship offices.

These greater efficiencies have been achieved through the adoption of a more agile working policy. Our staff have more flexibility in determining where they want to work, as their own needs dictate. Our office environments are set up to enhance the most valuable aspects of social interaction, alongside the provision of a range of work settings. Spaces designed for collaboration, including formal and informal meeting environments, now make up 30% of our total UK footprint, with ‘solo space’ (desks and quiet pods, etc.) making up only 40-50% (historically desking would have been nearer to 75%).

Delivering a 21^st century office

The adoption of our agile working policy involved a number of significant changes to the physical layout and indeed the feel of our office space. These changes have been implemented and governed with reference to our Workplace Guide, an evolving document which sets the required standards across our UK office network.

A key enabler of change in our Workplace Guide has been the complete removal of nominated fixed desks. Prior to COVID-19, our staff no longer had their own desks and, as such, would instead spend their desk time within designated ‘office neighbourhoods’. To give greater support to this approach, we are currently installing an in-house developed global desk booking app.

This more communal approach had implications for other, once standard, features of a typical official environment. The new policy saw the removal of pedestals and desk phones, in exchange for new facilities, such as staff lockers and neighbourhood boards, where staff can share their aspects of their personal lives, such as club memberships and family photos, if they choose. Other key changes include the provision of gender neutral washrooms and showers and the introduction of welfare rooms; essentially ‘work free’ spaces to cater for personal needs.

Location, location, location

Our policy has also brought about changes to the locational characteristics of our UK office footprint. Over the past decade we have increased the focus of our UK workspace into urban centres, allowing our staff to make better use of public transport infrastructure. Our larger UK offices are now all situated in central locations and serve as ‘hubs’ for visiting staff and clients from across the country.

Positively, our greater focus on urban centres has promoted lower reliance on car-based commuting; a key aspect of our sustainability goals. Our offices have their own Travel Plan which is used to determine the allocation of a limited number of parking spaces. Blue badge holders are automatically entitled to a space, while a points-based system is used to allocate the remaining spaces to promote green travel, critical business/caring requirements and shared/pooled car commuting. 

Winning hearts and minds

As with any form of large-scale change, thorough engagement and consultation with our staff has been absolutely crucial to achieving our goals. Understandably, for a proportion of our staff, certain key changes such as the removal of nominated desks and pedestals took time to get used to. Throughout the implementation of our policy, we have always sought to promote the wider benefits that such changes help to bring about, whether that be the greater work-life balance from more remote-working, the more choice in working environments and the synergy benefits stemming from wider interaction among staff.

Atkins’ senior leadership team was absolutely crucial to achieving our goals. Having our workplace policies announced and implemented from the very top of the business has played a pivotal role in gaining cross-staff support for the changes we have sought to make. The old mantra of ‘to practice what you preach’ is key to the success we have had in driving change and is a vital ingredient to any business embarking on a similar journey.

Coping with coronavirus

March 2020 saw the world turned upside down by measures to contain the coronavirus pandemic. While the period since has been challenging, the implementation of our agile working policy over recent years meant we were well prepared to have our staff work from home, en masse. Thanks to the technologies we have invested in and the mobile IT equipment our staff have at their disposal as part of our flexible work policy, the sudden transition to mass remote-working was largely trouble free.

As with so many businesses up and down the country, Atkins is now gradually managing the safe return of its staff back into the workplace. At Atkins, our approach to bringing the office back into active use involves a simple rota system. At the time of writing, our staff are allocated into three groups, whereby those in groups ‘A’ and 'B’ are welcome to come to the office in a weekly rota system, and those in the C group are requested to continue working remotely until conditions change.

Accelerating change in the workplace

It is still early days, but it seems inevitable that the impact of COVID-19 will accelerate the changes towards more flexible working practices across the services sector. In one key respect, Atkins has been ahead of the curve. Greater emphasis on the quality of workspace over simply quantity, while enabling more agile working, is likely to rise up the agenda of many CEOs over the next two years.

That said, Atkins is not resting on its laurels. During lockdown, we conducted a wide-ranging staff survey to ascertain the views of our UK employees around continuous home-working. The results were striking. Armed with all the tools for productive home-working, our staff were remarkably positive about the experience, with the majority in favour of working even more of their normal working week from home in the future. Pre COVID-19, our employees were in the office four to five days a week and post COVID-19 the survey found they would prefer to be in the office two to three days a week.

Future gazing and the office of the ‘new normal’

Despite the survey results, one thing is absolutely certain. The office is not a dying concept. Our staff would welcome more home-working, but the office still has an absolutely crucial role to play in forging relationships, building career experience, generating ideas and winning business.

Our staff survey revealed the reasons for accessing the office were; scope for social interaction, collaborating with / learning from colleagues and access to better desk/chair/monitor, printing/scanning. But, our staff liked being at home for more of their typical week due to the lowering of commuting hours, reduced personal costs, better productivity and better work-life balance. Coronavirus certainly doesn’t spell the death of the office, but rather an acceleration of an evolution that was already in train.

The results from our survey imply a more marked transition to the quality over quantity mantra in our office workspace. If our staff wish to work more from home, it suggests an even greater emphasis on collaboration space can be designed into our offices. In some instances, our offices could be ‘deskless’ and consist entirely of collaboration space. These would be places to meet colleagues and clients or undertake structured learning, leaving ‘focus time’ to be undertaken remotely.

One key area of consideration moving forward surrounds workplace densities. Could it be that the era of increasing workplace densities begins to reverse on the back of increased home-working and social distancing measures? Time will tell, but evidence suggests the removal of fixed desks and provision of more collaborative spaces is associated with lower densities.

As we adjust to the new normal, Atkins will continue to engage with staff and adjust our workplace for the benefit of our employees and the business.

About Atkins

Atkins is one of the world’s leading design, engineering and project management consultancies. With over 18,000 employees operating from 150 locations worldwide, it has a significant corporate real estate portfolio.

Unless there are quick savings to be made, office location strategy is probably not high on the typical CEO’s agenda right now.

During this unprecedented period, current priorities are focused on ensuring business continuity and maintaining a COVID-secure workplace. But, make no mistake, the pandemic is likely to influence major structural change over the years ahead.

A watershed moment

The implications of the pandemic on the future look and feel of the office have been well-debated in recent months. However, the pandemic’s possible implications for businesses’ location strategies are arguably no less important, and could be a key influence on demand in the next decade.

But, with regard to location considerations, the pandemic does not necessarily spell a shift of strategy in one particular direction. Different corporate occupiers will come to their own view as to what steps to take over the years ahead, and contrasting approaches will be seen in the near and medium-term.

Near-term implications

Given the current economic and practical challenges posed by COVID-19, efforts to contain cost and wriggle out of longer-term cost commitments are set to form a key aspect of market activity over the near term. Here at LSH, we are working with a growing number of occupiers that are seeking to use lease events as an opportunity to lower their operational expenditure.

The option to re-gear is very much in vogue right now, as occupiers’ pre-pandemic plans to invest in relocation have been put on hold in view of current, more pressing priorities. Landlords , understandably concerned over void risk and weaker demand, are also more likely to accept generous terms to guarantee their income streams. This is a good time for occupiers to strike a deal at their existing premises.

Upon break or expiry, another approach in the near-term is for occupiers to relocate staff into more flexible/fitted workplaces including serviced offices. While typically more expensive on a day-to-day basis than a conventional lease, this more flexible approach is undoubtedly going to prove attractive during these uncertain times. From a practical point of view, if measures around social distancing continue for a prolonged period, some occupiers may simply have to take additional serviced space to allow more staff into an office environment.

Fitted for purpose

It remains to be seen whether a short-term demand spike for serviced offices will lead to a permanent shift to this form of occupation. That said, while the stellar growth predictions of co-working formats have been dealt a blow by COVID-19, one unintended consequence of the pandemic may be a real boost to the prospects of more conventional style of serviced offices.

One thing that we certainly expect over the long-term is demand for fitted office space. Even pre-COVID, there was a steady growth in the provision of ready-fitted space. Post COVID-19, we envisage this trend to accelerate, as more occupiers opt for ‘plug and play’ opportunities, whereby the capital expenditure of a costly fit-out is exchanged for a higher rent. Early-mover landlords that adopt this concept will have the best letting prospects, allowing occupiers to relocate quickly and efficiently upon the end of a lease.

Scoping change

Once businesses have negotiated the immediate issues posed by the pandemic, in time, attention will turn the strategic goals around their workspace offers. Crucially, company decision-makers will have been impressed at the level of business continuity achieved through lockdown, where most if not all staff were based entirely at home. Understandably, CEO’s will be posing questions, such as “do we really need this much space?” or “should our network better reflect greater home-working?”.

A key first step in any location strategy is to garner the views of staff around increased home-working, as well as mapping the typical movements of staff between home and current place of work.

This insight is crucial, and will help to shape the next steps over location, and quantum of space businesses will build into their corporate real estate strategies.

Rethinking London occupancy

At time of writing, the rate of post-lockdown return to the workplace appears to have a geographical dimension to it. While the regional centres are seeing higher rates of staff returning (alongside social distancing measures), this is not the case in Central London. The mode of travel and the length / cost of commute associated with working in the capital may be key determining factors here, with staff arguably more likely to shun their Central London office at the present time but may consider an alternative location closer to home.

Allied to the fact total office costs are typically twice as high in Central London compared with their regional equivalents, we have a possible recipe for significant changes in the capital’s office market over the years ahead.

Future directions in location strategy

A clear implication of encouraging more staff to work from home or nearer to home is that space needs will be clipped. Even allowing for a lowering of staff densities in the office, a reduced footprint of 15% to 20% from the pre-pandemic level is perfectly conceivable when 40% of employees are working remotely at any one time.

Owing to practical limitations, occupier requirements for more or less space frequently involve a relocation. Over the coming years, we can expect to see many occupiers relocate on the basis of greater remote-working, either to save on cost or exchange quantity for quality within their accommodation budget.

While it remains to be seen quite how this will play out, we can expect attention to turn increasingly to better buildings and better locations, in terms of local amenities and connectivity with fitted options adding an extra layer of temptation for occupiers in a hurry.

Contrasting approaches for corporate occupiers

It gets more complicated for larger corporate occupiers with multiple offices around the country, offering contrasting approaches to location. In some cases, we can foresee occupiers with a significant multi-centred network look to close down some of their operations and take a more centralised approach, whereby a smaller network of larger offices function a key hubs for meetings and client contact points.

In other cases, corporate occupiers may opt for a more decentralised approach. This may have significant implications for Central London, which so often hosts the largest or HQ function of an occupier’s UK office footprint. Such an approach could entail relocation to a smaller, slicker, more client-facing London operation, alongside the opening of smaller satellite offices in the wider south east corner of the UK.

Good transport access and critical mass will still be crucial, however, and locations such a Reading, Croydon and Watford among others could make excellent ‘touch down’ points for staff that would previously have only commuted into Central London. Such locations will also look particularly attractive for serviced office operators, whereby some companies prefer to incorporate greater flexibility into their new footprint.

Thinking beyond flexible working

As the concerns around the pandemic subside, the greater propensity for flexible working will have a key role to play in corporate real estate location decisions over the coming decade but it shouldn’t be the only consideration.

LSH is already in conversation with a number of public and private sector occupiers to help inform and this process. For more information around how we can help you, please visit www.lsh.co.uk or get in touch with one of our experts.