Analysis | Quality Offices Will Attract Quality People

Just as before the pandemic, employees’ demands for flexibility are likely to include access to a pleasant office. Imagine a firm that decides to maintain its existing floor space despite partial homeworking, and allows every employee to have their own desk. With the office, say, two-thirds full, the square-foot-per-person-ratio shoots up to levels that would have been deemed profligate pre-Covid. But the staff like having their cake and eating it, and staff turnover falls.

Meanwhile, a rival firm shaves the rent bill by signing a lease for one-third less space and making everyone “hot desk” — employees with early morning duties like childcare always end up with the rubbish seat. Which of the two companies finds it easier to recruit?

Analysts at UBS Group AG point out that hot-desking risks being a false economy. Citing research by property group Great Portland Estates Plc, they estimate rental costs are equivalent to 5-10% of a typical London business’s revenue. Assuming salary costs account for around half, they ask: “Will management risk ‘100’ in revenue, and force the ‘50’ (i.e. employees) to desk share in order to save a percentage of the ‘5-10’?”

For commercial property investors, the impact of increased homeworking will probably be mitigated by the need for less densely packed offices as long as the novel coronavirus remains a public-health threat. The most significant driver of demand is likely to remain employment, not working habits.

If the analysis is right, it’s supportive of the London office market. The city already packs people in more tightly than most other financial centers, with only 9.5 square meters per desk versus 10.4 in New York, says UBS citing Cushman & Wakefield data. That may need to reverse. London’s vacancy rate is also low versus the U.S. financial capital, implying less slack.

KKR & Co. sees value in the city — it recently took a 5% stake in Great Portland Estates. The low valuation of U.K.-listed office operator Derwent London Plc makes sense only if you believe its average rents will fall to less than one-third of what prevails at the top end of the U.K. capital’s prime West End district, UBS reckons. That’s a huge margin for error. 

The stock market is behaving as if Zoom and Microsoft Teams have destroyed the competitive advantage of an airy office. That doesn’t compute.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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