The news media is full of stories about public sector plans to cut spending and their impact on employment and services. The big stories relate to the number of jobs that will be lost – most of which will be administrative, support and back office functions. From government announcements it is clear cuts will lead directly and indirectly to a drastic reduction in office requirements, particularly in the public sector.

Many organisations both public and private are already preparing and progressing extensive programmes of office rationalisation focussed on vacation for disposal and particularly lease termination activity. For example in 2011 the UK Government achieved a 6.5 million sq ft reduction in its estate while also extending its ban on taking new or renewal of leases until 2015. In the local authority sector Birmingham City Council are progressing a 35% reduction in its 1 million sq ft back office estate and Somerset County Council have recently approved plans to vacate 40% of its office space. But the pace and quantity of this offloading is expected to accelerate over the next 2 years as the new austerity bites and forces change beyond traditional ways and existing organisational boundaries.

Things looked rosy, backed by the credit driven boom and Public Sector growth in the years up to 2008 but now property markets and values are, with few exceptions on the floor, and some maybe moving towards the basement. This means organisations must review office strategies and vacation plans made in easier market conditions and rapidly re-focus activity to the new harsh realities.

Indeed in these challenging times large parts of corporate office estates are increasingly being viewed as underutilised, inflexible carbon inefficient liabilities that are a drag on rapidly changing organisational needs and business effectiveness.

Organisations can no longer afford long gestation periods and talk without action as they find themselves in the position of having to deliver a great deal more with a great deal less in a short timeframe.  Almost without exception, organisations are following similar paths in driving their office plans even harder to meet growing demands for greater savings and to make up for the diminishing receipts, and inflexible PFI commitments.

Not only do these plans need to take out existing surpluses and poor performing properties but they must also take account of the need to accommodate fewer people in more effective ways. Organisations are rationalising their people numbers, but they also now have the long needed driver to focus on sharing, outsourcing and particularly wider implementation of agile and distributed working. These plans must also provide the groundwork to support the leaner, more agile and virtual productive workforces that will be essential to take advantage of opportunities when better times do appear.

There has been significant investment in new technology, infrastructure and workplaces over the last decade. However, the full benefits of this investment have rarely been claimed due to political inertia, poor management and a lack of business drivers in a profligate booming economy. The current “crisis” now provides the environment to dismantle these barriers to transforming work enabling the creation of more capable agile workforces and seizing the full opportunities from past investment – not in the previous piecemeal approach of pockets and pilots, but across  estates, businesses indeed whole sectors.

A Capita Symonds survey confirmed that 80% of Councils are considering co-locating with other public bodies as a way of saving public property costs. “Total Place” is providing a holistic regional property review with the aim of significant rationalisation through sharing space and resources across all government-funded organisations. In addition to sharing, organisations must also look to utilise their “operational” estate to support distributed and remote working – using existing neighbourhood offices, libraries, housing centres, depots as touchdown offices, as well as “third places” – all of which diminish and change the overall central office requirement.

Many previously reluctant public organisations are now being forced to seek significant property and related savings as well as service improvements through new ways of working and development of agile working programmes. The majority of organisations currently seem satisfied with agility ratios of 70 to 80% (desk share of around 10 people  to 7 or 8 workstations),  but the Monmouthshire County Council example of 50% agility ratio (2 people to 1 workstation)  across its office estate points the way for more ambitious opportunity.

Due mainly to culture and management inertia home working to date has limited application in the public sector, apart from some notable exceptions like Ofsted where over 50% of the organisation is home-based. Workstyle analysis is important to establish suitability of  work and individuals for homeworking, but the ability to use home as a workplace regularly or occasionally for a large element of the workforce is one of the key aspects to the most effective agile working programmes.

The current budget cuts will inevitably force a reappraisal of the wider introduction of homeworking – not just for property savings but also for productivity and service improvement.  The mature BT Agile Working  model shows what can be achieved, where about 15% of its workforce are registered home workers, and a further 70% are remote and homework enabled. BT has seen more than 50% reduction in its office estate over the last decade, with accommodation savings from Homeworking alone amounting to over £100 million pa. Additionally home enabled employees are 20 per cent more productive than office-based colleagues and have 50 per cent lower carbon footprints.

The Office is certainly not dead but its function is changing as technology enables and competitive financial pressure demands re-definition of work and the workplace. Indeed as Jacobina Plummer agile working programme lead at Unilever said “the purpose of today’s office is to bring people together in spaces designed around activity with the emphasis on collaboration and the absence of assigned desks” and this can lead to the “rebirth of the office  rather than its protracted death.” Nevertheless, the overall result of cost cutting, sharing, outsourcing and transformational activity is that many organisations will be, and are implementing plans to reduce their office requirements by up to 50% .

What will happen to all this vacated office space.  Clearly the natural logic of large quantities coming onto an unreceptive market  is that there will be a massive oversupply. Yet nearly every organisation appears to be focused on feeding this oversupply. Where will demand for office space come from ?

One way for office occupiers to minimise the liabilities of their unwanted lease portfolio is to transfer to a lease liability specialist. Virgin Media recently transferred liabilities and responsibility for managing 28 surplus office buildings to Legacy Portfolio. Under the deal, Legacy assume the costs relating to the rented properties, and pursue reductions or disposal as quickly and as cheaply as possible. Legacy receives an upfront fee covering only part of the total costs of the lease liability, which include insurance, security, taxes, maintenance and utilities in addition to rent – they make money by keeping whatever is left over from the upfront fee. Paul Harris, Virgin’s director of property said “Legacy will take over 530,000 square feet of office space across the UK, allowing Virgin Media to focus on adding value to the operational estate of over 650 properties.”

However, it definitely seems like bad news for many Landlords. Ian Ellis of Telereal Trillium recently confirmed at Public Property UK, “In the life of this parliament, we’ll end up with 4m sq ft of empty space to deal with. These are 1960s and 1970s secondary properties in provincial towns. In the past, we’ve been able to let these to quangos or councils. The culture has been one of: the government will renew because it always renews. Most bodies have expanded rather than shrunk. That is no longer the case. There is more surplus coming to the market, and there is shrinking demand from the public sector overall”.

Demand for existing offices will remain, helped by lower values and tenant friendly deals, but at a considerably reduced level for some years to come.  Speculative development is unlikely although there will be opportunities particularly in the best locations and for better quality space as organisations consolidate and upgrade to newer more carbon efficient space. But the reality is much older space will remain unattractive, even obsolete and alternative uses may be the best focus for these properties. At the same time it will be interesting to monitor the imminent impact of changing more stringent carbon regulation and new international accounting standards on office leases.

And when economic fortunes do improve it is still likely that global competitive pressures, new technology and new agile ways of working will focus attention on “spaceless growth” and more agile sustainable property strategies that require different types of space, procurement methods and tenure arrangements. So who will need offices ?

What are your thoughts…..

Paul Allsopp
The Agile Organisation