Property paying price of pandemic

On January 10, 2020 LinkedIn announced it had signed a 25-year lease on three office blocks being built at Wilton Park by property firm IPUT.

When added to its existing block at Wilton Park, it would have occupied a massive 600,000 square foot campus in the heart of Dublin’s central business district.

This would have allowed the Microsoft-owned business networking site to increase its Irish workforce by another 4,000 by 2023.

The ink was hardly dry on the Wilton Park lease when the world changed dramatically.

Covid-19, a virus about which most of knew little and cared even less about in early January 2020, had virtually shut down the global economy just two months later.

Suddenly, the trend towards companies allowing their workers to work from home accelerated.

Many employers found that, with stringent lockdowns in force, it was either working-from-home or no work at all. Needs makes must and within a few weeks Zoom had gone from being an obscure Californian video communication company to a verb.

Once the working-from-home genie had been freed there was no way it was going to meekly re-enter the bottle. More than two-and-a-half years after the pandemic first struck the developed world, working-from-home – at least some of the time – has become an integral part of many employees’ working regime.

Just how integral was illustrated in a report by UK property consultants Lambert Smith Hampton (LSH), which was published last June.

It found that, in only 15pc of the companies surveyed, were staff working an average of least four days a week in the office. This compares with 90pc before Covid-19. In almost half the companies surveyed, 43pc, staff were averaging just two days a week in the office while they were managing three days a week in another 29pc of the companies.

Even more remarkable is that staff in 13pc of the companies were going into the office just one day a week or even less.

While many companies are making strenuous efforts to persuade their staff to go into the office more often, almost half of those in the LSH survey were of the view that “some sort of action” needed to be taken, this is proving easier said than done.

In the meantime, confronted with acres of expensive space lying empty most of the time, companies have been cutting back on their office space.

The LSH survey found that a mere 8pc of firms were planning to increase their office space, 20pc to stay the same while a massive 72pc, almost three-quarters, were planning to cut back on their office space.

In many cases these reductions could turn out to be quite severe. Among the 72pc of companies planning to cut back on their office space, 38pc expected a reduction of between 20pc and 39pc while a further 26pc of companies were preparing to cut their office space by at least 40pc.

What this might mean in practice was spelled out by consultants PwC who have forecast that major UK employers could reduce their office space by as much as 9 million square foot (836,000 square metres) while LSH reckons that working-from-home will see companies eventually reduce their office space requirements by at least 20pc.

And the persistence of working-from-home isn’t confined to the UK.

“It’s very much the case that a lot of organisations are looking at hybrid [a combination of working-from-home and traditional in-office] working both to attract and retain talent”, says Maeve McElwee, IBEC’s executive director of employer relations.

In a recent survey of member companies, IBEC found that, with over half of companies expecting to increase their headcount in 2023, 74pc of companies were offering the option of hybrid working as part of their strategy to recruit new staff and retain existing employees.

While hybrid working isn’t really an option for most manufacturing or distribution businesses, where the vast majority of staff need to be physically present most of the time, it’s a very different story with many of the large tech firms.

​When announcing that it was not going to occupy blocks 2 and 3 at Wilton Park, LinkedIn made the connection between its decision and working-from-home explicitly clear.

“With our shift to hybrid, more of our team in Ireland are working from home on some days and from the office on others, so we’ve also made the decision to not occupy Two and Three Wilton when construction finishes,” said the company in a statement.

While LinkedIn’s abortive move to Wilton Park – the company already occupies block 1 in the development and still plans to move into block 4 – is the highest-profile casualty of working-from-home up to now, it is by no means the first.

In August it was reported that TikTok had pulled out of negotiations to rent 16,400 square metres in the Shipping Office development at Sir John Rogerson’s Quay. TikTok has since agreed to let 8,000 square metres of space at the nearby Tropical Fruit Warehouse development.

Meanwhile Facebook has paused the fit-out of its Fibonacci Square building at its campus on the site of AIB’s former Ballsbridge headquarters – the Facebook decision may not be entirely due to working-from-home as parent company Meta has implemented a global hiring freeze.

When contacted by the Sunday Independent, beyond confirming that LinkedIn had signed a 25-year lease with a 12-year break clause, i.e. LinkedIn is on the hook for the next 12 years and it is its responsibility to sublet the space, IPUT very politely declined to comment.

While it isn’t unprecedented for tenants to decide not to occupy space which they have already leased and sublet it instead, property industry sources were surprised by the timing of the LinkedIn announcement as blocks 2 and 3 aren’t due to be completed until late next year.

By releasing the news now is LinkedIn hoping to flush out an alternative user(s) well in advance of the agreed occupation date?

So what are the implications of working-from-home for, what had been up to now, Dublin’s booming office market? Most of the major property agents are now predicting that at least 200,000 square metres of purpose-built office space will be taken up by tenants this year. This is close to the long-term, i.e. pre-pandemic, average of 240,000 square metres.

However, despite much recent good news, it is clear that for the property sector working-from-home is the elephant in the room, or should that be the office!

In their published research the agents resort to an impressive range of circumlocutions to describe the phenomenon including; “space will become available as occupiers settle with their occupancy footprints requirements post-Covid and look to shed surplus office space” and “many occupiers are still solidifying their office portfolio strategies as they adapt to the hybrid working model”.

While the take-up in Dublin office space remains strong, yields (rent as a percentage of the property’s value) have been rising. Prime office yields, which had been running at about 4pc since 2017, rose to 4.15pc in the third quarter while yields on office in secondary and suburban locations rose from 5.75pc to 6pc.

​Although much of this increase in yields was due to higher interest rates, property investors typically seek to “juice up” their returns by including a large proportion of debt on their balance sheets, working-from-home certainly hasn’t helped.

This rise in yields has fed through into lower values – property yields and values are inversely related with a rise in yields resulting in a fall in values and vice versa. The third quarter IPD/SCSI Irish property index, which monitors the value of €9bn of commercial property assets, was released last Thursday. It showed that overall Irish commercial property values fell by 1.8pc in the third quarter. Office values, which fell by 2.5pc, experienced by far the steepest drop during the quarter and have now fallen by 3.3pc over the past year.

Prime Dublin offices seem to have been disproportionately affected with values in leafy Dublin 4 down by 4.2pc in the third quarter and by a chunky 7.1pc over the last 12 months.

Interest rate cycles may come and go but working-from-home increasingly looks as if it is for ever. Under the terms of the Government’s Right to Request Remote Working Bill workers will have a legal right, subject to certain conditions, to work remotely.

IBEC’s McElwee feels that the Government is being premature in imposing a legal right on employers to allow staff to work from home.

“Employers face the challenge of managing people whom they don’t see regularly. The Government is now granting a legal right [to employees] to request remote working. We feel that it would be better as a code of practice to start with. Imposing a legal obligation might be too early.”

Whether it be a legal obligation or, as IBEC’s own research demonstrates, an economic necessity when seeking to recruit and retain staff in a tight labour market, working-from-home is here to stay. A large proportion of workers will in future work at least some of their time from home. This means that their employers will need less office space. The fall in office values may have only just begun.