Changing priorities in London office market are driving up costs

The changes to the world of work that we have seen since the start of the decade are well documented. Hybrid working patterns have evolved, video and cloud technologies are now a mainstay, and shifting workplace usage patterns are enabling – or even forcing – companies to think differently about how and why they use their space.

This is set against a backdrop that a company’s largest expense is both its people and its physical space. Add to this recent inflationary pressures, economic headwinds, disrupted supply chains in the aftermath of covid-19, the war in the Ukraine and the current Red Sea conflict, and it’s a heady cocktail of challenges, layering complexity and cost, for occupiers.

At the same time, new regulations around sustainability and inclusivity are also informing occupiers’ expectations of their offices.

One consequence has been adaption and investment in office portfolios. High-end office fit-out costs in London are greater compared with cities across the rest of England with Manchester 50% and Birmingham 24% less, respectively.

This stems from the fact that London has been at the frontline of such trends, and the city’s central occupier base in financial, tech, professional services and creative industries remains under pressure to navigate fit-out costs alongside three critical priorities: flexibility, talent and sustainability.

Prioritising flexibility – for workers and property teams

Dynamic working patterns, partly as an after-effect of the pandemic, are making it harder to maintain a consistent, present workforce in the office. As a result, it is much more difficult for businesses to plan how best to utilise space in the long term, while remaining agile to the impacts of economic challenges.

Uncertainty is making occupiers put flexibility front and centre in their plans. Negotiating shorter leases is becoming more common, with clients preferring to make decisions on their office occupancy every five to eight years, rather than the typical 10 to 15-years. These shorter cycles are dissuading occupiers from significant capital expenditure and encouraging more targeted investment so offices can adapt on a case-by-case basis.

Such flexibility often comes at a premium when it comes to fit-out. Clients want the ability to easily reconfigure spaces depending on business needs. Moveable partitions or non-fixed AV equipment make offices more flexible, but are much more costly.

Investing in talent

Of course, cost is far from the only consideration – it needs to be weighed up against value, especially when looking at the expectations of an occupier’s most critical assets, its people.

The demands and priorities of the modern workforce have evolved and employees now desire centrally-located, amenity-rich destinations with great connectivity including food and beverage catering, on-site showers, fitness facilities, bicycle racks, social spaces and state-of-the-art technology to be persuaded back to the office.

This, unsurprisingly, comes at a cost. For example, a tea or coffee point in a high specification, flagship grade A office in a central location (or in central London) has an average total cost of £720 per square foot, compared with £360 per square foot for a medium specification fit-out.

Across a whole floorplate, these extra costs will mount but, for many occupiers, are necessary to encourage collaboration and productivity by bringing teams back together.

Embracing data to drive sustainability

While productivity and talent considerations have been front of mind for many, the longer-term priority is likely to become sustainability. Commitments from occupiers to reduce their environmental impact, including the move towards green leases, are increasingly shaping decision-making

For organisations this means specifying an operationally low-carbon space which can include deploying smart building sensors to track energy efficiency, greening offices for employee health and wellbeing, or requesting use of outdoor areas. There is also a pull towards spaces with NABERS, BREEAM, LEED or other similar accreditations.

As companies place a greater priority on carbon reporting, we anticipate further acceleration of the trend towards clients requesting spaces at shell and core to avoid the emissions related to stripping back from a generic CAT A fit out.

Typically, low carbon systems come with a higher capital and operating outlay. However, by utilising carbon impact assessments and whole lifecycle costing upfront, occupiers can make informed decisions on what systems to choose and what the expenditure will be to meet their carbon targets.

It should also be noted that aligning space with sustainability criteria is a challenge in itself. Older building stock requires substantial time and investment to future-proof, while there is a current lack of new office developments in the capital.

This is creating a green premium, and ultimately occupier competition, for the best and most sustainable spaces in London.

Data driving decisions

To navigate these potentially competing priorities – of carbon, talent and flexibility alongside cost – we will see a growing emphasis on digitally-driven decision-making. Tracking office space utilisation has long been discussed, but is now accelerating at pace, helping to inform choices over where budgets should be focused for each fit-out.

Carbon calculation, while more complex, is also coming to the fore. Occupiers in mature markets such as the UK now have access to growing datasets on the carbon impact of specific materials and designs, allowing them to manage carbon as a second currency alongside cost.

Ultimately, occupiers are working hard to understand how these changing behaviours are impacting costs and business decisions, but should expect flux to remain the norm for the foreseeable future. In this instance, quality data will be essential to ensuring that fit-outs keep up to speed with the needs of the modern workplace.