Many workers at offices in the City London might not return after the Covid-19 pandemic © AFP via Getty Images

The British office market is having one of its “Road Runner” moments. Like the coyote in the cartoon, it is still running forward despite having left the edge of the cliff some time before.

The vast Covid-19 economic stimulus last year has helped keep returns going for the sector, with central bank programmes pushing European bond yields into negative territory. Agents Savills reckons the average spread between them and rental yields on prime European offices is now about 3.25 percentage points, well above historical average.

That makes the sector still attractive to global investors, many flush with cash. But the glaring absence of the rent-paying tenants in their shiny offices (and shops) will no doubt catch up with the market as gravity inevitably does with the Road Runner’s nemesis.

Companies have been busy planning for new working models in the new year and beyond — and the need for real estate will be structurally affected as a result.

Most bosses are delaying any major return to the office until the spring at the earliest, when it is hoped that vaccines would have reached enough people to restore some normality. Even then, many think that office needs will be much reduced after the mainly successful shift to working from home.

Reviewing property requirements is high on corporate lists as a result. Many companies plan to downsize, cut costs and push through permanent hybrid models of working between the office and the home. 

Google has told employees that they will not be expected to return to offices until September, and then for a flexible work programme with only three days in the office. Many others are making similar moves — and that potentially means discarding as much as two-fifths of their office needs.

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Where companies have not been able to drop or negotiate leases, many are looking to sublet space, often at lower than market rents to rid themselves of the financial liability. 

London has seen among the largest rise in Europe this year of so-called grey space — the term for offices not technically on the market but empty and available — according to Savills

In the City, office vacancies have risen from 5.5 per cent to 6.5 per cent in 2020 — equivalent to about 9m sq ft — and the majority of this increase was from tenant-controlled space.

Remarkably, rents have dipped only a little last year, but that cannot continue. The City is heading for its lowest take-up for more than a decade, while there is about 15.5m sq ft of development and refurbishment coming on tap between now and 2024. 

There will be longer-term winners. Already bosses are talking about wanting less but better space, equipped for meetings, events and “Zoom Rooms”. These will need to be more attractive to entice people to take on costly commutes again, leaving behind the lifestyle choices they might have made — be it a lockdown puppy or a move to the country.

Simply providing banks of desks for people to answer phones and send emails feels increasingly out of date. People will want to socialise, collaborate and feel the excitement of a busy workspace — the office is far from dead — but buildings should be calibrated.

Head offices need to become the corporate showroom, with middle management and back-office staff now equipped to work from home. Decent regional offices should benefit as large companies seek hub-and-spoke models, with remote teams meeting in nearby cities. Shared offices are a good long-term bet as companies seek occasional and flexible meeting and working space.

Standard Chartered, for example, is partnering with an office provider for “near-home” workspace for staff, which will allow them to walk to work in half an hour.

But that leaves a large number of practically obsolete buildings where rents will have to fall sharply to attract any sort of tenants. This is true not just in London — almost all financial capitals are seeing marked lower demand.

Investors will feel the pinch — and many owners of near-empty offices are pension funds and local councils, risking a heavy toll for private and public finances well into the new decade.

Last November, the City of London Corporation told the Financial Times about plans to encourage a “back to the office” week in April. But the City has emptied once again under tier 4 coronavirus restrictions, so office owners can now expect an entire year without many tenants — and the real prospect that some will never return again.

daniel.thomas@ft.com

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