Confident trend to reduce office space will continue - David Horne

The commercial property sector has faced a plethora of challenges as a result of the pandemic. From the abrupt enforcement of remote working leaving bustling city centres unrecognisable, to the accelerated digital transformation of the high street, real estate has been reimagined.

David Horne, Corporate Partner, Addleshaw Goddard

The transition to remote working has generally been successful, with many firms now looking to implement hybrid working moving forward. Some organisations have decided to shift to a wholly remote model, with no requirement for physical office accommodation.

Of those who do want to get back to the office, many firms are looking to downsize their footprint and are instead prioritising high-quality space designed with flexibility in mind. Importantly, organisations want workspaces which promote better health and wellbeing.

Similarly, as the high street rapidly moves online, long-standing retail leases are being terminated, leaving a glut of units no longer fit for purpose.

The most recent Addleshaw Goddard Scottish Business Monitor, in partnership with the Fraser of Allander Institute, confirmed this, with more than a quarter of businesses expecting to permanently reduce their office footprint by two-thirds.

It also highlighted the shift in priorities for firms when it comes to choosing new office space. Good internet connectivity ranks as most important, overtaking close proximity to city centres and location. However, with change comes opportunity.

In London and surrounding towns, a shift is already taking place. In April, City of London officials outlined its five-year strategy to convert vacant offices and shops into 1,500 new homes by 2030. This will not only help revive high-streets, but address the requirement of much-needed affordable homes.

We’re already starting to see similarities north of the border, with savvy investors capitalising on vacant office spaces for residential opportunities.

Whilst build-to-rent (BTR) opportunities are becoming commonplace across city centres (such as Moda’s Holland Park in Edinburgh and Watkin Jones’ scheme at Glasgow’s Portcullis House), we’re also starting to see an increase in convert-to-rent opportunities.

With a steady level of investment in the market – particularly from PE funders - developers are purchasing vacant office blocks with a view to converting them into high-quality and affordable housing options across city centres.

This is part of a move towards more properties being rented rather than purchased in city centres, as young people are priced out of the market by soaring costs.

With a shortage of housing in Scotland, convert-to-rent is a clever strategy which will help revitalise existing building structures and encourage more people to live in city centres.

It also creates a domino effect on supporting the wider economy through encouraging increased footfall outside traditional office hours and supporting the night-time economy as restrictions ease.

From an investment perspective, costs associated with convert-to-rent developments are significantly lower in comparison to BTR schemes. They also carry better sustainability credentials as refurbishment projects create less emissions to deliver than a project built from the ground up. As green credentials are now paramount for firms across the board, this could be a big factor in why convert-to-rent schemes become so popular.

We are also seeing more forward-funding agreements, a trend noted previously with BTR developments. Planning authorities view this ‘change of use’ positively and are encouraging flexibility within these spaces.

Addleshaw Goddard has been advising a number of clients as they delve into the convert-to-rent sphere. I’m confident this trend will continue.

David Horne, Corporate Partner, Addleshaw Goddard