This article originally appeared in React News.
2021 marked the first full year in a post-COVID world. The office sector will naturally reflect on the last 12 months and look to measures like take-up and investment figures to gauge sentiment and set expectations for the year ahead. But given the disruption of the past year, do we need to dig a little deeper to understand the trends that might shape the market in 2022?
I've been an office market analyst for over ten years and have seen the market adjust after three major inflection points: the Global Financial Crisis (GFC), Brexit, and now the COVID-19 pandemic. What's interesting is that none of these seismic events significantly altered how we analyse tenant demand.
Pre-2008, the central London market was dominated by financial and professional services tenants but the GFC, which coincided with the launch of the smartphone, saw the tech sector overtake them and become the key driver of demand. The tech sector, and the rise of coworking, saw a change in how the office was perceived, with community, collaboration, and wellbeing starting to emerge as trends. The move to more flexible models of occupation accelerated following the Brexit vote, given the uncertainty it had created for many businesses.
Today, the COVID-19 pandemic has changed market dynamics once again. The widespread adoption of hybrid working has raised questions about the future role of the office. There's an immediate need to understand day-to-day occupancy and what exactly differentiates the best workplaces from the rest.
Against this backdrop, are our trusted metrics enough to give us a true picture of what is going on?
My prediction is that the pandemic may be the catalyst for a re-evaluation of how we analyse and understand tenant demand. We've seen a similar evolution in the housing market: sentiment is still shaped by sale prices and mortgage approvals, but data on viewings and searches on property portals gives a more forward-looking picture of buyer confidence and demand.
In the US, we launched the VTS Office Demand Index (“VODI”). Rather than analysing take-up, which by default is backward-looking, we examine office viewings. Crucially, we establish a pre-pandemic benchmark for viewings and track all activity against that baseline. In US gateway cities we're finding take-up lags viewings by an average of three months, suggesting it's a strong forward-looking indicator.
Furthermore, looking at viewings helps us understand what proportion of requirements are "active," another reliable proxy for demand. In the UK, we've tended to look at upcoming lease events to calculate future demand, but that can be misleading as some occupiers will renew or may even decide to surrender a lease and switch to a coworking or remote working model.
Of course, demand, however you measure it, doesn't always translate into leases transacted. There's an argument that we need to do more analysis to understand why a lease wasn't signed — was it the product spec, cost, location, time constraints, or did the building lack sustainability credentials? This may tell us more about the nature of demand than looking at completed deals.
In the post-pandemic market, the biggest obstacle to understanding demand is understanding how businesses and individuals are actually using office space. Before work-from-home guidance was reintroduced, Remit Consulting reported that office occupancy was an average of 21% in November, but this helicopter view doesn't necessarily give landlords a real picture of future demand for the space they own and manage.
VTS Activate is a tenant engagement platform that not only gives landlords a real-time look at occupancy but also allows them to see how populated individual spaces are, the utilisation of meeting rooms and amenities, and the flow of people through buildings on different days of the week. The challenge now is to bridge the gap between understanding use and preferences at an individual asset level and understanding wider market demand.
As the saying goes, you should never waste a good crisis. Perhaps in the London office market, we'll emerge from the pandemic with a better understanding of our customers.
