Not only would men never wear ties again in a work setting, but remote working was here to stay. Their view was that the obituary of the traditional office could be safely written…

With the last lockdown restrictions in the UK lifted in February 2022, we are almost 30 months on from Covid-19, and work-life behaviour has pretty much settled down. I don’t know about you, but I still go into the office — ok, not every day, but I do for the majority of the working week, and I look forward to it.

Of course, there has been a significant post-Covid shift in working practices, most noticeably the widespread adoption of remote and hybrid work models, reducing the need for large office spaces. There has also been a notable decrease in demand for traditional office spaces, particularly in central business districts. However, there is growing interest in flexible office spaces and co-working settings that cater to hybrid work models.

New environments

At LHV Bank, we are still seeing plenty of investor demand for properties that include office space, but the key change is that there is a real requirement for the space to have flexibility. While some companies may typically now want people in two to three days a week, many will require everybody in one day a month, so they’re looking for the ability to achieve this with the office space.

As a consequence, businesses are seeking more flexible, collaborative environments rather than traditional office layouts. People are firmly used to the comforts of working from home, so many businesses have concluded that to keep staff happy (and to stop them moving elsewhere), the office should feel more comfortable and homely than it may have been in the past.

This isn’t just about the internal office space; we are seeing landlords looking at the bigger picture with their mixed-use portfolios. Where they have control over the whole environment — for example, a retail parade with offices above — they are managing the atmosphere of the ground-floor commercial properties to ensure there are amenities that appeal to the office workers.

•   As tech redefines workspace dynamics, CRE industry must prepare for forward-thinking office spaces
•   RICS reports gradual recovery in commercial real estate sentiment
•   Commercial property investment volumes hit £8bn in Q1 2024

For example, we've seen clients with a vacant retail space take a broader view and perhaps pass over an opportunity for a tenant which would pay a higher rent in order to fill the space with a coffee shop or dry cleaners, which they know would meet demand from the office workers.

In addition, we've supported a few shopping centres where they’ve sought out a gym tenant in order to increase opening hours and, as a knock-on effect, increase the demand for protein shakes and the like from the post-workout crowd.

Meanwhile, with remote work reducing the necessity for daily commutes, there is increased demand for suburban and regional office spaces. These locations offer lower costs and more convenience for employees living outside city centres.

Beyond the office

Of course, the commercial real estate market is not just about office space, far from it. At LHV Bank, for example, we have a niche in lending to those operating in the care home and hotel sectors. The pandemic also accelerated the growth of ecommerce, increasing demand for warehouses and logistics centres, which we have also lent on.

We’re seeing experienced property investors — those with strong asset management experience — increasingly operating more across multi-tenanted properties. This could include commercial and residential property together with leisure space and retail: a broad mix which offers the investor a spread of risk across a range of asset classes, as well as a blend of yields.

These suit LHV Bank as, unlike some lenders operating in the commercial sector, we have the ability to manage transactions which span multiple asset classes, including multiple sub-sectors of commercial real estate and specialist BTL.

There’s no doubt that the UK commercial real estate investment market has been significantly impacted by post-Covid working practices, but the reports of the ‘death of the office’ are certainly premature. The shift towards remote and hybrid work models has altered demand for different types of properties, presenting both challenges and opportunities for clients. What it does mean is that brokers need to partner with a lender that understands the new landscape and has the ability to successfully deal with complex transactions.