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Who will drive office demand post-lockdown?

Developers and landlords expect the technology sector to be the first to bounce back after ‘unlockdown’. The office market’s future depends on them.

29/03/2021 7 min read
Freshfields’ offices at One New Bailey Salford, designed by tp bennett. image: paul riddle

Words: David Thame

The tech bros have left the building. Literally. Inspired by the pandemic, and then by the potential benefits, CEOs at Facebook and Twitter have declared homeworking to be permanent. There’s no need to grab that hoodie and pull on those Vans: staff can work from home forever, if that’s what they want.

Which is great news if you are Facebook or Twitter, who realise this could save them a fortune in real estate costs, but it is alarming news for the office market. The widely-shared hope in the UK office sector was that tech occupiers were the future of workspace. They would fill it, and make it funky. Now it seems like they aren’t.

But is this true? Are tech occupiers really abandoning the workplace? Should landlords and developers dial-down their hopes for tech-inspired growth in office demand? Or is something else going on?

The answers to all three questions could provide some comfort, but at the price of a little more complexity.

The first question – are tech occupiers really abandoning the workplace? – is easy to answer. It is both yes and no, but mostly no. The second question – should the office market dial-down its hopes from the tech sector? – is harder to resolve.

The problem is that the tech sector hasn’t actually performed very well in key markets. In central London, the tech, media and telecoms sector accounted for 23% of office take-up in the final quarter of 2019, according to Avison Young’s regular Central London Office Analysis. This put it on level pegging with financial services.

Fast-forward through the tumbleweed to Q4 2020 and, in an admittedly thin year for office deals, the tech sector fell back dramatically, taking just 16%, compared to the financial sector’s 26%. Yes, everyone’s totals were down, but the tech sector’s fell much, much faster.

Comparing two points in time does not make for an infallible analysis. For instance, tech did somewhat better earlier in the year, and financial services somewhat worse. But it does show that the assumption that a tech-fuelled lockdown world has somehow insulated the tech-office market from trouble is probably wrong.

So where do developers and landlords think the tech demand is coming from? The answer is: from everywhere. This bold gamble is behind the latest flurry of tech-themed development proposals.

Phil Mayall is Development Director at Muse Developments, the developers behind a crop of Greater Manchester schemes aimed squarely at the city’s flourishing tech sector. As trader-developers who build, let and sell schemes to investors, it matters to Phil that he has a reliable stream of office occupiers. Muse can’t afford to be very patient, because their business model depends on selling a fully let (or almost fully let) building within a year or so of completion.

This kind of discipline concentrates minds, and Phil is fully aware of the risks. Even so, he says he is banking on tech.

‘There’s this idea that somehow a band of roving coders is going to like your building and land there – but that is not how the tech sector works, it is not reality,’ Phil explains.

‘The cliché a few years ago was that every firm is a tech firm. Well I think that’s not quite true either, but a lot of parts of a lot of firms are tech, and that is where much of the tech demand for office floorspace comes from.’

Phil points to the New Bailey development in Salford as an example of the way tech will infiltrate and stimulate the 2021 office market.

City law firm, Freshfields, has its tech hub in a 125,000 sq ft tenancy at the development: without it the business could not operate. Knowing that a large tech workforce was on site tempted HM Revenue & Customs to bring a large tech-based operation to the site. They signed up for 235,000 sq ft. Soon after, BT decided to follow them to the neighbourhood, signing up for 175,000 sq ft, and landing nearby were Booking.com and Futureworks, the creative industries’ educator. You could sum it up like this: there are no tech firms, but there is lots of tech in lots of firms.

So whilst developers like Muse appreciate that overall demand from office occupiers is likely to reduce, thanks to homeworking and flexible working practices, they are not unduly alarmed. They think they can make a powerful appeal to potential occupiers’ tech-facing elements.

‘Yes, office requirements generally are shrinking a little. There’s evidence of 15-20% reductions in the amount of office space occupiers are looking for. The handful of cases where they have shrunk requirements by more, by as much as 50%, are often atypical,’ Phil says. ‘But those smaller requirements are now looking much like the tech-requirements of the recent past, because they are insisting on more collaborative space, more quiet working space, more breakout areas and booths in which they can take a Zoom call. This is exactly what pure tech occupiers want too.’

And this in turn helps explain developers’ optimism. The line of thinking goes like this: returning to work, post-lockdown, will require a better office environment. But stripping out and refitting an existing sub-optimal office is time consuming and disruptive: staff need to be decanted elsewhere. How much easier it is simply to start from scratch and sign up for a brand new office which meets all your needs?

You could call this the kind of whistling to keep the spirits up, indulged in by all property developers. Or they could be onto something.

Joe Rigby, Head of Occupier Services at CBRE, thinks the latter. He is among those hopeful that the return to work means a return to better workplaces, which means new and newly fitted-out office blocks.

Lest you think this is just another cliché, be patient: this one has serious financial consequences. Joe explains: ‘Look at the sectors that are booming just now – the gaming sector is blowing up amazingly – and, in their world, coders and designers are in front of desks and screens a lot, you see a lot of stress, anxiety and mental health issues, so those kinds of tech occupiers have not been slow to talk about new ways of approaching office amenity, and what they want out of an office building. ‘This poses a challenge for developers and landlords, because they have to find ways to make buildings attractive and keep people engaged, and stress-free.’

This trend is now seeping into the thinking of all office occupiers. ‘Today everyone is, in effect, a tech occupier. Even the most conservative occupiers of the past, like the bankers and financial services firms, are now talking tech,’ says Joe.

Not only do all occupiers want what tech occupiers want, but they are also beginning to use the same decision-making processes about their workspace. In particular, demographics have shot up their agenda. Having the right kind of people in the neighbourhood, and the right kind of labour pool (in other words, exactly the kind of thing Google worries about) has become mainstream. This poses yet another interesting challenge for developers and it is at this point that the serious financial consequences kick in.

Office buildings without the right kinds of amenities, and without demonstrably the right local demographics, tend to take longer to let. And the longer a building takes to let, the more expensive it gets for the developer. Six months’ missed rental on a 20,000 sq ft central London floorplate letting at £50 a sq ft, means a cool £1m of income foregone.

With seven-figure losses racking up, developers know they have to get this right.‘Tech isn’t so much a sector anymore. It is driving everything, and it is driving the property decision-making of businesses where the tech headcount may be no more than 10 or 20%,’ says Joe.

And our third question – is something else going on, behind the scenes? The answer is yes. Landlords and developers are adapting to a world in which satisfying the tech-facing element of any business is now the litmus test for satisfying any part of an occupier business.

It does not mean every developer expects to be providing floorspace for coding geeks and cloud-storage specialists. But it does mean that it has to feel like they do.

And if that doesn’t amount to a revolution in the conservative world of UK workspace, nothing will.


Tech developments

Telling tech and non-tech occupiers apart is getting hard. Which makes it all the stranger that many office developers continue to target the ‘tech sector’ as if such a thing were easy to identify.

One of the first developments out of the blocks in 2021 is the 625,000 sq ft Station Hill development in Reading. Developer Lincoln MTG is ‘mainly targeting tech sector occupiers’, the scheme’s cheerleaders say.

The £750m Station Hill development adjacent to Reading Station has won planning approval. The first office building will total 275,000 sq ft.

‘There has been considerable occupational interest,’ says James Finnis, Head of South East Offices at JLL, who promises the scheme’s own tech-based ecosystem will provide occupiers with complete control of their workspace.

Preparatory work on the site is now underway, with completion due in 2024.

The design of the project is being overseen by an international collective that features CallisonRTKL acting as the project master planner and architect for the residential and hotel buildings, Gensler as the architect for the commercial office buildings and LDA Design as landscape architects for the public realm.


Tech works from home?

Facebook and Twitter have made working-from-home a regular part of the way they organise their businesses. But the wisest observers say it means less than it seems – for several reasons.

Top of the list is the gamble that most young tech employees would prefer not to work from home a great deal. After a year confined to their homes the WFH pledge is the kind of perk nobody much wants to use.

Second, not every tech giant has taken such a WFH-positive approach. Alphabet and Google CEO, Sundar Pichai, has extended home working until the autumn, but has insisted staff spend at least three days a week in the office when the return-to-work order finally goes out.

Google is pressing on with its 650,000 sq ft London campus office HQ – the so-called Landscraper – but has yet to announce when construction work will be completed, or when it expects to take occupation. Google has, however, pulled out of plans for a 200,000 sq ft office development in Dublin.


 

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