Demand for urban office space is changing: cities need more flexibility

A co-working space. Image: StartupHub/Wikimedia Commons.

What does a good office look like? When cities are thinking about intervening in their city centre office market, the temptation will be to simply build more office space. This will be the right call in some cities, but others may already have a plentiful supply of offices. In these places, the quality of the existing city centre office space will be more important, as well as the extent to which it supports the growing trends for co-working and flexible space.

But before deciding how and when to intervene, cities need to first figure out the specific gaps in their local office market where private developers aren’t responding to existing demand. There’s no single national office market, and the quality of offices on offer varies a lot across the country.

The map below – using data from the Centre for Cities’ recent report Building Blocks: the role of commercial space in Local Industrial Strategies – shows that while 39 per cent of offices in Southampton city centre is of a high quality, this drops to only 9 per cent in Coventry and Leicester.

Source: Non-Domestic Energy Performance Register 2018.

But while this data shows the quality of office buildings, it doesn’t tell us much about what occupiers want from offices. The value of offices is determined by the location, condition, and the amenities they are able to offer to occupiers, and understanding the services occupiers are demanding is key for any office market.

One growing trend in office space is the rise of co-working. Collaborative spaces such as WeWork have recently expanded in London and Manchester and in other large cities around the world.

These have two main advantages for businesses – knowledge spillovers and more efficient use of commercial space. Freelancers can rent desks in these offices, devour free snacks and coffee, and meet and do business with other enterprises who have sat down right across from them. Start-ups and larger firms also use the flexibility to easily acquire (or reduce) desks as their needs change, squeezing as much value as possible out of city centre locations by not paying for excess commercial space.

But it’s not just the big cities which are seeing office space change. In our research for the Building Blocks report, we were struck by how many other cities across England and Wales are already responding to occupier demand by providing features such as co-working or ‘easy in, easy out’ flexible leases. Warrington, Bradford, and Bristol are all embarking on co-working spaces of their own.


Demand for these innovations in office space is therefore widespread across the country. For instance, the non-profit IndyCube provides co-working office space in London, but also in cities like Wakefield, Cardiff, Swansea, Newport and over a dozen towns in Wales. Even in urban areas with very small economies such as Rhyl and Abertillery, it is possible to rent a desk, just as you can in the most up-to-date offices in large cities.

Each city should identify any weaknesses in their office market, and justify whether they should respond to them through their Local Industrial Strategy. In some places, this might be providing more high-quality buildings, and in others, it might just be more co-working and innovative space.

Crawley, for example, has a city centre which lacks large offices of 5,00m2 or more, while the average city has roughly a quarter of its office space in buildings in such large offices. Based on the evidence Centre for Cities laid out in our report on the Economy of the Gatwick Diamond, this suggests Crawley could perhaps justify intervening to supply more office space. Other cities such as Preston, by contrast, may have plenty of large offices – but have a shortage of high-quality buildings or innovations like co-working.

When it comes to interventions, cities should only act when it’s clear there is a market failure and the private sector is not responding to existing demand. Huddersfield and Derby have both supplied small amounts of new office space with features such as co-working, one step at a time so as not to swamp local demand, in response to a shortage of office space in the city centre and a lack of new private sector supply.

This is not to say that “build and the jobs will come” justifications for risky speculative office schemes will work – they won’t, as cities should be intervening in commercial property to respond to demand, rather than trying to create new demand. Improving skills and transport provision will be more important than shiny new skyscrapers in most cities.

But in cities where there is an existing kernel of high-skilled work, making sure this activity has the office space it needs in the city centre is an important step for improving local productivity. As work changes, cities should recognise that their commercial space will need to evolve too.

You can explore city-by-city data on office space with the Centre for Cities’ commercial property dashboard.

Anthony Breach is an economic analyst at the Centre for Cities, on whose blog this post first appeared.

 
 
 
 

A new wave of remote workers could bring lasting change to pricey rental markets

There’s a wide world of speculation about the long-lasting changes to real estate caused by the coronavirus. (Valery Hache/AFP via Getty Images)

When the coronavirus spread around the world this spring, government-issued stay-at-home orders essentially forced a global social experiment on remote work.

Perhaps not surprisingly, people who are able to work from home generally like doing so. A recent survey from iOmetrics and Global Workplace Analytics on the work-from-home experience found that 68% of the 2,865 responses said they were “very successful working from home”, 76% want to continue working from home at least one day a week, and 16% don’t want to return to the office at all.

It’s not just employees who’ve gained this appreciation for remote work – several companies are acknowledging benefits from it as well. On 11 June, the workplace chat company Slack joined the growing number of companies that will allow employees to work from home even after the pandemic. “Most employees will have the option to work remotely on a permanent basis if they choose,” Slack said in a public statement, “and we will begin to increasingly hire employees who are permanently remote.”

This type of declaration has been echoing through workspaces since Twitter made its announcement on 12 May, particularly in the tech sector. Since then, companies including Coinbase, Square, Shopify, and Upwork have taken the same steps.


Remote work is much more accessible to white and higher-wage workers in tech, finance, and business services sectors, according to the Economic Policy Institute, and the concentration of these jobs in some major cities has contributed to ballooning housing costs in those markets. Much of the workforce that can work remotely is also more able to afford moving than those on lower incomes working in the hospitality or retail sectors. If they choose not to report back to HQ in San Francisco or New York City, for example, that could potentially have an effect on the white-hot rental and real estate markets in those and other cities.

Data from Zumper, an online apartment rental platform, suggests that some of the priciest rental markets in the US have already started to soften. In June, rent prices for San Francisco’s one- and two-bedroom apartments dropped more than 9% compared to one year before, according to the company’s monthly rent report. The figures were similar in nearby Silicon Valley hotspots of San Jose, Mountain View, Palo Alto.

Six of the 10 highest-rent cities in the US posted year-over-year declines, including New York City, Los Angeles, and Seattle. At the same time, rents increased in some cheaper cities that aren’t far from expensive ones: “In our top markets, while Boston and San Francisco rents were on the decline, Providence and Sacramento prices were both up around 5% last month,” Zumper reports.

In San Francisco, some property owners have begun offering a month or more of free rent to attract new tenants, KQED reports, and an April survey from the San Francisco Apartment Association showed 16% of rental housing providers had residents break a lease or unexpectedly give a 30-day notice to vacate.

It’s still too early to say how much of this movement can be attributed to remote work, layoffs or pay cuts, but some who see this time as an opportunity to move are taking it.

Jay Streets, who owns a two-unit house in San Francisco, says he recently had tenants give notice and move to Kentucky this spring.

“He worked for Google, she worked for another tech company,” Streets says. “When Covid happened, they were on vacation in Palm Springs and they didn’t come back.”

The couple kept the lease on their $4,500 two-bedroom apartment until Google announced its employees would be working from home for the rest of the year, at which point they officially moved out. “They couldn’t justify paying rent on an apartment they didn’t need,” Streets says.

When he re-listed the apartment in May for the same price, the requests poured in. “Overwhelmingly, everyone that came to look at it were all in the situation where they were now working from home,” he says. “They were all in one-bedrooms and they all wanted an extra bedroom because they were all working from home.”

In early June, Yessika Patapoff and her husband moved from San Francisco’s Lower Haight neighbourhood to Tiburon, a charming town north of the city. Patapoff is an attorney who’s been unemployed since before Covid-19 hit, and her husband is working from home. She says her husband’s employer has been flexible about working from home, but it is not currently a permanent situation. While they’re paying a similar price for housing, they now have more space, and no plans to move back.

“My husband and I were already growing tired of the city before Covid,” Patapoff says.

Similar stories emerged in the UK, where real estate markets almost completely stopped for 50 days during lockdown, causing a rush of demand when it reopened. “Enquiry activity has been extraordinary,” Damian Gray, head of Knight Frank’s Oxford office told World Property Journal. “I've never been contacted by so many people that want to live outside London."

Several estate agencies in London have reported a rush for properties since the market opened back up, particularly for more spacious properties with outdoor space. However, Mansion Global noted this is likely due to pent up demand from 50 days of almost complete real estate shutdown, so it’s hard to tell whether that trend will continue.

There’s a wide world of speculation about the long-lasting changes to real estate caused by the coronavirus, but many industry experts say there will indeed be change.

In May, The New York Times reported that three of New York City’s largest commercial tenants — Barclays, JP Morgan Chase and Morgan Stanley — have hinted that many of their employees likely won’t be returning to the office at the level they were pre-Covid.

Until workers are able to safely return to offices, it’s impossible to tell exactly how much office space will stay vacant post-pandemic. On one hand, businesses could require more space to account for physical distancing; on the other hand, they could embrace remote working permanently, or find some middle ground that brings fewer people into the office on a daily basis.

“It’s tough to say anything to the office market because most people are not back working in their office yet,” says Robert Knakal, chairman of JLL Capital Markets. “There will be changes in the office market and there will likely be changes in the residential market as well in terms of how buildings are maintained, constructed, [and] designed.”

Those who do return to the office may find a reversal of recent design trends that favoured open, airy layouts with desks clustered tightly together. “The space per employee likely to go up would counterbalance the folks who are no longer coming into the office,” Knakal says.

There has been some discussion of using newly vacant office space for residential needs, and while that’s appealing to housing advocates in cities that sorely need more housing, Bill Rudin, CEO of Rudin Management Company, recently told Spectrum News that the conversion process may be too difficult to be practical.

"I don’t know the amount of buildings out there that could be adapted," he said. "It’s very complicated and expensive.

While there’s been tumult in San Francisco’s rental scene, housing developers appear to still be moving forward with their plans, says Dan Sider, director of executive programs at the SF Planning Department.

“Despite the doom and gloom that we all read about daily, our office continues to see interest from the development community – particularly larger, more established developers – in both moving ahead with existing applications and in submitting new applications for large projects,” he says.

How demand for those projects might change and what it might do to improve affordable housing is still unknown, though “demand will recover,” Sider predicts.

Johanna Flashman is a freelance writer based in Oakland, California.