Predictions for 2023: What’s next for the U.K. office sector?
As 2022 comes to a close, there has been a lot to contemplate for landlords and occupiers in the UK office sector, and in particular those in major city centres. There have been a number of different factors affecting the market over the last 18 months and 2023 will continue to present similar trends and challenges.
What have we seen so far?
Inflation
The UK saw inflation hit a 41-year high in October 2022 reaching 11.1 per cent. This has had a considerable impact for both landlord and occupiers looking to construct or refurbish office, leading to longer construction times and higher fit out costs.
What has this meant for prime office rents?
Overall, prime office rents have remained robust throughout the recent economic turmoil and there has been a shift towards occupier demand for high quality, modern, collaborative space. Since the COVID-19 pandemic, it has been a challenge for businesses to retain their staff, encourage employees back to the office and demonstrate commitment to employee welfare.
Many businesses now view investing in high quality property as essential and shows commitment and investment to their employees by doing so. Employees perception of the office environment has also changed, people now want to know if the building has amenity space, showers, bicycle storage and want clear data on the sustainability of the space they inhabit.
Are environmental pressures making a difference?
Buildings account for 40% of global emissions according to the Environmental and Energy Study Institute, meaning there are huge opportunities to reduce global emissions. The mitigation and adaptation of climate change both significantly hinge on the quality of the built environment.
The most recent RICS report ‘Decarbonising UK real estate’ outlines the main policy reforms needed to accelerate the reduction of both embodied and operational carbon emissions arising from real estate in line with national decarbonisation targets. The regulatory framework to decarbonise real estate is tightening across the UK, with a review of buildings Minimum Energy Efficiency Standards (MEES) targeting a minimum EPC rating of B for offices in England and Wales.
Environmental pressures and requirements now faced by occupiers has led to a war competing for the best available offices with the highest sustainability credentials. The market has now developed into a tiered system ranging from A BREEAM ‘Outstanding’ to C energy rating or lower. The problem we’ve seen is that there’s a large amount of office space available but a lot doesn’t meet the high standards of today’s discerning occupiers.
Hybrid working
The continued use of hybrid working is another factor to consider in the current market. Businesses are weighing up their workplace needs vs workplace design, and this balance is continuously evolving. Some of the latest research suggests working from home has increased employee productivity, but also shown to negatively affect wellbeing. Working from home is most likely here to stay but the role of the office and having the right space that meets the evolving needs of the workforce has become more important than ever.
Predictions for 2023
- Landlords with exceptional buildings will have the ability to charge market leading rents even in the current economic climate
- Spotlight on occupier regulatory requirements
- Supply and demand – there will be limited supply of high quality sales and rental stock
- 2023 will see a fall in property values against a backdrop of increased construction costs
- Continued use of hybrid-working and the challenges associated with this
- Improvement of buildings – construction, design and energy efficiency
