Occupancy ratios: will tenants become more demanding? – Jones Lang LaSalle
Jones Lang LaSalle has been considering trends in occupancy ratios for UK office space, and whether developers can recoup the costs of changing base building design through higher rents.
Developers of office space, especially City of London offices, have traditionally produced base building specifications that allow one person for every 10 sq m – an occupancy ratio of 1:10 – with perhaps one or two floors at higher densities, of 1:8 to 1:6. However, JLL says landlords have recently begun to consider incorporating a base building design of 1:8, as seen in the 20 Fenchurch Street office tower in EC3 – the so-called Walkie-Talkie building.
“With more and more tenants looking closely at occupancy ratios in order to drive down cost per head, will tenants be prepared to pay more headline rent for less space while still accommodating the same amount of people?” asks JLL. “And will staff be prepared to accept the reduced space per head and possible resulting changes in work practices?” JLL notes that Markel and Savills have recently taken pre-lets on office space at 20 Fenchurch Street and 33 Margaret Street, W1 respectively, and that both firms intend to occupy part of their office space at 1:8, reducing the overall space taken and cutting overall costs as a result.
While this higher-density occupation may only work in certain cases, it is a “workplace tool of increased interest,” JLL notes. As costs become increasingly scrutinised, the firm expects to see more and more occupiers making decisions that trend towards “less space but better space” – a trend already seen across European office markets.
There are some implications for the market: rental growth becomes more challenging when the overall growth in a market’s occupancy base (net absorption) is questionable, JLL says. Instead, growth will become even more polarised, towards the best quality, more flexible property that enables denser occupation as companies trend towards having fewer locations and less space overall across their property portfolios. “The question remains as to whether tenants will actually pay for the improved density,” it adds.
