“Back to life, back to reality” – prescient words written by Mr Jazzie B. OBE for his number one hit in the summer of 1989. Industries, livelihoods and, undoubtedly, future geopolitical direction currently ride on the answer to when or if we will go “back to life”.

For the UK’s life, pension and general insurance funds to meet their respective obligations and liabilities, they need a regular stream of dividend income. These receipts have over the years originated in no small way from property-related investments. Indeed, in the ten years to 2020 offices outside London delivered an impressive annualised total return of 8.6%. Of this, the tenant rent roll accounted for over three-quarters. Indeed, as yields from gilts and fixed income more generally have compressed, total investment into property assets increased steadily, amounting to £49.5bn in 2019.

In 2020, however, UK investment activity has fallen off the furlough cliff with a mere £16.5bn investment in the six months to 30 June 2020. True rental cheques from occupiers directly involved in or linked to grocery and medical services have all been very gratefully received. However, what of the postal position of cheques from other occupiers? General retail and leisure: the dog ate it, but a replacement will be with you once/if reality is restored; warehouse and industrial: already posted and you should have received it; office: posted and see you soon.

Let us be clear that a structural occupational shift in the types of UK commercial property demanded was under way well before this year. What this crisis has done is accelerate matters across consumer-facing commercial real estate – super-charging demand for property linked to delivery logistics, at the same time as collapsing it for real estate relying upon consumers visiting. While the crisis has accelerated what was already in evidence for some time in relation to consumer CRE, it has hit the office market in a way not experienced since the global financial crisis over a decade ago.

Enter again, stage right, the valuers who back then held the literal fortunes of property owners in their hands. They know then and they know now that their forced portfolio desktop valuations, which are underpinned by tenancy agreements and, where possible, transactional evidence, will have consequences. While in the run-up to 2008 valuations were, let us say, rather cavalier, in the years leading up to our present situation they were instead very cautious. Cognisant of exuberant valuations in the years leading to the denouement of 2008, subsequently followed by legal recourse, the last decade has seen cautious valuations in most sectors and regions.

In the case of ever more unfashionable traditional retail, the downward valuation trend has been studiously flagged and published by valuers – the inevitable and therefore predictable result of the drying-up of rent cheques and asset fire sales. Across in much more favoured logistics and industrial sectors, the pricing pendulum moved much more favourably. Indeed, we have seen a tidal flow of money being deployed into this sector from new strategies, funds redeploying disposal funds from other sectors such as retail, and overseas funds seeing a safe haven into an easy-to-understand real tangible asset class with an adequate yield. So, where does this leave the office, facing as we are told the structural rise of WFH, and what office bears are claiming will prove to be a permanent decline in office demand.

Innovation rarely evolves in a vacuum. Teams collaborate to innovate at speed, with younger members generally learning more by osmosis and application alongside experienced team members than by Zoom lecture. Herein lies the company as a lifeform, which history has shown succeeds best with efficient face-to-face communication to ingrain a culture of expectation, ethics, industry and, most importantly, a shared goal in a common space – the office. Indeed, while the office was once deemed a cost centre, in time it has been promoted to a position of profit, with administrative tasks sent offshore.

The profit-centre thinking has of course been strikingly challenged by this crisis, which has raised the ‘perfectly workable idea’ that most office work can be performed at home; our collective heads being up in the clouds as our bodies are mostly separated. Employees, those not furloughed and so still engaged in their work, have spoken of the extra hours they saved by not commuting, and seeing no reason to return to the office. We have, moreover, been told there is a surge to sell small flats and move to large, secluded abodes in the country, with the aim of popping into the office on occasion.

“Back to reality” – managers, founders, and shareholders know profit requires innovation, which has been shown to be best distilled from teams. Google reaffirmed its commitment to its new central c. £1bn London headquarters, a horizontal skyscraper known as a landscraper, stretching 330 metres, longer than the 310-metre height of the Shard skyscraper. This prime office space is designed to Google’s exacting requirements and particular floorplate setup, which works best for its team structures and culture. Facebook is due to become a neighbour, with the development of its own building. From their inception, both these cutting-edge organisations showed the prescience and commitment to enable their workforces to work from home but have continued nonetheless to expand their physical estates to provide their staff a communal office home. If one is in the habit of following leaders, then these most definitely are leaders to be in the slipstream of, with earnings and share prices providing clear beacons.

The office, believed to have originated in ancient Rome, has survived volcanic eruptions, plagues, fires, floods and evolving working practices from Taylorism and the rise of the open-plan office, to cubicle farms, Burolandschaft, and the action office. For all the talk of the office being ‘the next retail’, the evidence states otherwise. Saville’s latest research states West End office prime yields remained static in July and August 2020, with regional UK offices currently suffering a severe undersupply of Grade A and good-quality Grade B availability, and the office rental invoices continue to be predominately settled by occupiers. In fact offices, as we saw following the global financial crisis in 2008, again head the league table of rents collected among all of the CRE asset classes.

As the UK economy recovers: retail will contract, terms will be renegotiated increasingly based on turnover, and inevitably repurposing will be visible; industrial space demand will continue to increase due to the weight of money chasing it coupled with the supply chain restructuring from just-in-time to just-in-case; and offices will change. Office occupiers will be ever more demanding. They will increasingly expect wellness attributes such as increased natural light, lower occupancy density, breakout/relaxation areas, showering and exercise facilities, bike storage, improved air quality and ventilation – all, it must be added, were developing trends before this crisis struck.

There will also be a surge as firms maintain their central city office hub and add to it well-serviced satellites in large city suburbs and large towns. All of this argues for an increase in demand for office space across the UK, but particularly in the regions, and with limited supply this bodes well for total returns. Maybe valuers will soon fairly reflect the true value of offices and the importance this sector has to play in the future economy. This is reality!

Experience, flexibility, and empathy coupled with an asset management platform featuring extensive resources will be required to successfully navigate through the next stage of the property cycle.