Corporate real estate is on a ‘cliff edge’ as firms race to rethink communal spaces

As businesses downsize in the hybrid-work era, empty offices could become ‘flats for millionaires with little daylight’ – or an opportunity to reinvent the city centre.

As more employees work from home in the hybrid-work era, many companies are finding they need smaller offices. Compared to pre-pandemic floorplans designed to house as many workers as possible, more businesses are looking towards more compact but higher-quality spaces for the future.

According to figures from global commercial real estate firm JLL, 48% of clients in major markets, including the UK, Germany and France are seeking to decrease their footprints in the next three to five years as a result. “Our clients are working out what to do with the space they’ve got by analysing data from recent years to come up with long-term plans,” says Stephanie Hyde, CEO UK and CEO EMEA Markets at JLL. “In addition, many leases are expiring, companies are pressing ahead to meet sustainability agendas and they’re focusing on getting hybrid working right.”

This imminent corporate downsizing is set to have huge ramifications for the real estate industry. As more leases end, experts anticipate a tidal wave of available commercial space on the market. According to March 2024 data from workplace research firm Leesman, total space reductions could reach 40% across its global client base of 766 firms. Projected onto central London, if the same proportion of the city’s occupiers opt to reduce their footprints, this corporate downsize would be the equivalent to 56.6 million sq ft (5.26 million sq m) of office space.

In the rush for better workplaces, the offices left behind may remain empty. “More organisations are looking for spaces that enable a better workday for employees, in more attractive parts of the city,” says Tim Oldman, founder and CEO of Leesman, based in London. “As companies pay top dollar for quality, the gravitational pull to newer, higher-quality offices leaves behind a vacuum for lower-grade buildings.”

Not all vacant buildings can be updated to meet new market demands, nor retrofitted into residential units. “Many large organisations are chasing net zero targets, so will move to newer buildings with environmental certification and the latest technology,” says Oldman. “And the investment behind commercial real estate – designed for mass open-plan spaces – means it’s not economically or practically viable to repurpose them into homes. They’d be flats for millionaires, with little daylight.”

Businesses are also being more selective over where to base their headquarters, says Duncan Swinhoe, managing principal for Europe at design and architecture firm Gensler, in London. A traditional tenant in the city’s central Mayfair district, such as a hedge fund, may now be more inclined to relocate to “edgier” neighbourhoods that appeal to more employees, he adds. “The proximity to amenities, coffee shops, bars and good transport links is a much more significant factor in location now – employers want to attract their people to the office.”

While a market reset may be on its way, Oldman says he doesn’t believe the commercial real-estate industry, nor entire business districts, will be wiped out in the long term. “As more companies opt for newer offices that look stunning, in great locations and with fantastic space inside, there will be a raft of older buildings plummeting in value. But there are too many people with huge sums of money invested to allow a cataclysmic event to happen, and for swathes of cities to become ghost towns.”

Instead, over the following decade, vacated commercial buildings are set to be updated, transforming areas formerly packed with office workers during workweeks, and nearly deserted over weekends, into “hybrid destinations” filled with greater green spaces, pedestrianised areas and leisure options that keep a more consistent weekly footfall.

Purpose-built business districts will need updating, says Swinhoe. He cites London’s largest financial district, Canary Wharf as an example. “It has very large single-use buildings, designed in a monofunctional area, that now needs reinventing to support a wider range of uses.”

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