So everything is dandy in the London office market? The answer depends on who you talk to. There is a lot of generalised anxiety about the extent to which the UK government, and multinational corporates, will insist on a return to work. Without this, there could be problems, which would reverberate back up the property food chain. For instance, The Economist speculated that a cut in office occupancy would reduce the value of office real estate, with implications for the insurers and pension funds that own them.
That is regarded as an unduly alarmist view by most; and as a misunderstanding by others. Instead, they hang their hopes for the London office market on what is called ‘peak capacity theory’ and it goes like this.
Justin Curlow, AXA Investment Management Alts’ Global Head of Research and Strategy, explains: ‘In a post-COVID world we expect office occupiers to focus on two key priorities: first will be peak and not average demand as it relates to their ultimate space needs. Akin to how transit infrastructure is planned.’
This is for the same reason the London Underground knows that, during the day, it will be operating half-empty trains, but plan their capacity based on peak needs, not on average needs. So big office occupiers will take offices knowing that, much of the time, they will not be fully occupied. They too will take office space for peak requirements, rather than the average attendance.
In other words, office occupiers expecting maybe one-third of their staff to be working away from the office at any given time cannot afford to reduce their office floorspace by one third. This is because they know there will be occasions when almost everybody is in the office (midweek, perhaps, or for big projects or events). So they have to plan for a headcount closer to their actual (peak) total rather than for the average (off-peak) total.
Deals like Morgan Stanley’s suggest a 20-25% reduction in floorspace. This is less than some feared, but maybe a little more than their eventual requirement, if Justin is right.