Coronavirus leads to dramatic declines in leasing activity.
The office market – like the rest of the UK economy – is going through unprecedented times. Economic output is estimated to have shrunk 20.4% during the second quarter. Quarterly falls during the Global Financial Crisis were just a tenth of that level. UK office leasing activity was just below 4.5m sq ft in the second quarter—almost 70% less than the 5-year quarterly average.
Unemployment to impact office demand
Many (ordinarily) desk-based jobs are currently being done from home, meaning offices are suffering from low occupancy. If lockdown behaviours ease and restrictions continue to loosen, offices should see occupancy rise—particularly in less densely populated areas where workers face less arduous commutes. Unemployment is more of a concern for office demand: forecasts show the UK unemployment rate increasing markedly, only returning to near 2019 levels in 2025.
Availability to increase as second-hand space is returned to market
New development deliveries and some occupiers looking to offload space meant slightly higher availability of offices in Q2 2020. Office users prefer to occupy the best they can afford. As requirements for office space reduce, expectations are for a noticeable increase in non-prime space being returned to the market. This will lead to a polarisation between the best and the rest. Rental levels for non-prime offices are likely be negatively impacted as their availability rises.
Which sectors and office markets will suffer most?
Office markets that are ordinarily densely populated, such as Central London and parts of Greater Manchester, will feel the impact of COVID-19 more sharply than others as occupancy remains low into the autumn. Reduced demand in the short-to-medium term will come from those sectors most impacted by the current crisis and by Brexit. Retail, manufacturing, financial services and the serviced office sector remain vulnerable.