Ghost Town: What will Happen to the Surge of Empty Offices in London?

What’s the story?

The impact of Coronavirus, and subsequent lockdowns, resulted in a sizeable portion of the British workforce working from home. The Office for National Statistics showed that the number of people working exclusively from home rose from 21% to 24% from September to October. This was previously 38% mid June.

The absence of workers in the office has led to a surge in empty office space, particularly in London. It is estimated that unused office space in London will cost businesses £12.84bn. In fact, according to a report by Space Three Two, over 70% of all office rent paid by London businesses will be spent on empty desks. This disparity in supply and demand can be seen in the following graphs:

The above graph shows a steep drop in office demand in 2020. This is particularly steep in demand for retail and office space. When compared with the availability of office space, we are able to see a significant disparity between supply and demand.

One would be forgiven in assuming that if Coronavirus is the cause of this decline, then once the virus is gone, there will be a return to normal office levels. However, this does not seem desirable by either employee or employer. Pre-Covid, the average London office worker spent 4.2 days a week in the office, but a recent survey showed that employees, post-Covid, want to spend an average of 2.7 days in the office, with 1/10 wanting to work from home on a permanent basis. The same is true for employers. A Gartner report showed that over 70% of CFOs (Chief Finicial Officers) are planning to move part of their on-site workforce into remote working arrangements.

Coronavirus, however, has not impacted all areas of real estate equally. Remote working has seen an exodus from the city into the suburbs, and this has been reflected in the housing market boom. This has been spurred on, in part, by the Chancellor’s stamp duty exemption and in part by the phenomenon of ‘de-metropolintanization’. In London, for example, a PWC survey of people 45-64-year olds found that the participants expect to move to a different region outside of London next time they move.

This uptick in housing demand has seen large commercial property developers turn their attention to developing residential property. Take for example Landsec (the largest commercial property developer in the UK), recently their CEO Mark Allen stated the company’s intention to invest heavily in residential property. They plan to do this by selling almost a third of their £12.8bn commerical property portfolio.

This has been made easier thanks to Boris Johnson’s regulatory changes which have removed much of the unnecessary red tape on converting commercial property to residential.

How will this affect law firms?

Where there is smoke, there is fire. Similarly, where there is opportunity, there are lawyers.

Disposing of property and investing capital brings with it a demand for legal services. On the sale side, a lawyer negotiates property transactions, structuring arrangements for conveyancing, preparation of documents such as contracts, and collecting property information from surveyors.

On the buy side, a client can require a lawyers advice in raising capital for an acquisition or investment, negotiating contracts and reviewing contractual terms, and, as mentioned previously, gather information from surveyors and local authorities.

Law firms will also be employed to provide clarity on the numerous new rules regarding commercial leases. For example, Section 82 of the Coronavirus Act 2020, a moratorium on the termination of business tenancies. Or the introduction of the Commercial Renr Arrears Recovery (CRAR) Procedure. Whilst also being required to advise clients on drafting residential leases in respect of the new laws. For example, the exemption from eviction until after Janaury 2021 and the requirement to give a tenant 6 months notice when issuing a Section 21.

On the litigation front, there are potentially many avenues which can lead to termination of commercial contracts. Across the pond, the question of whether Coronavirus constitutes force majeure for the purposes of frustrating a commercial lease was recently asked in the New York case of Change your Life LLC v 9E16 by 1771 Holdings LLC.

In addition, the surge in residential leases brings the prospect of future litigation, particularly during times of economic uncertainty when many tenants may fall into arrears.