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The future of offices - full transcript of BCO round table

At this year’s MIPIM, Archial, the AJ and the British Council for Offices brought together industry experts to discuss the impact of the recession on design and provision in the office sector. Read the full transcript here

Taking part in the round table were:

Roger Zogolovitch
Managing director, Lake Estates

Tony Burton
Partner, Gardiner & Theobald

Philip Harcourt
Head of development consulting, Colliers CRE

Maxwell Hutchinson
Non-executive director, Archial

Paul Finch
Editor emeritus, The Architects’ Journal and the Architectural Review

Colin MacLaren
Head of Property Services Group, Paull & Williamsons Solicitors

Richard Kauntze
Chief executive, British Council for Offices

Charlie Smith
Director, Archial Architects, Aberdeen

11 March, 2009, Cannes

Paul Finch

Much of the conversation at MIPIM this year has been, ‘oh my god we’re all doomed’ but let’s not moan about how tough things are. Let’s talk about the implications for the provision of office space and office design in an economy which we’ve not experienced for many years, certainly not since early ‘90s. It may get worse but at the end of the day we are an office economy, and we’ll continue to build offices. But I wonder about the implications. Roger, perhaps you could start.

Roger Zogolovitch

I think it’s interesting what Jones Lang LaSalle were telling us about statistic across Europe. Office market is in maximum oversupply, prices are falling, rents are falling, tenant incentives are rising, and yields are softening. What’s good about that is it demonstrates the health of the real estate market. It’s always been very good at adjusting very quickly to these kinds of conditions. Nobody’s building at the moment because there are no funds around, therefore the supply is finite. Demand is going to go on, re-pricing will erode that supply and at some point whether it’s 2010 or 2011 that curve on the supply side will evaporate and that will be when normally in the cycle investment will come back into it.

We hope the money is there to start the process. We all know the building process is a 30 month process. The issue for me is to say, is this a normal cycle, where you come back to a bounce: i.e. do you come back and end up with the growth rate coming up, or are you going to end with a cycle where people will say we now have an appetite to pay less rent, to use our buildings more economically, to ensure that our buildings fulfil our mission statement?

So on the one hand the mission statement says that we as an organisation, as a corporate entity will ensure that we follow our sustainability and green principles. But on the other, we have the development industry producing buildings that we are told are appropriate for the investing institutions but which do not fulfil those satisfactions.

None of us round this table can say that a fully air conditioned building with raised floors and glass facades actually fulfils any kind of sustainability objective. The interesting thing for me, (as an architect and a developer I’m in the speculation of what the future might bring), is whether there is a new typology of build that has the same kind of appropriateness as the current typology, which is not a class-A office, which is something else, actually what we might call a raw office, or a white collar factory.

Maxwell Hutchinson

I recently reviewed the new Broadgate Tower and 201 Bishopsgate, and was fascinated to learn that 201 Bishopsgate has been let almost immediately on the classic Bishopsgate letting model which is a single occupier for a six-storey, large building. Two thirds of the tower is let, and it certainly hasn’t got any of the credentials of a sustainable building at all: acres of glass, tonnes of steel, concrete, intensive use of lifts and circulation. It’s the only building in London which has a two-storey lift system with elevators that distribute to two floors simultaneously. It’s something we ought to discuss at the next BCO conference – it’s all about getting people in and out more quickly.

But it’s ended up being a more interesting building than I think was originally intended because it’s an air-rights building built over the tracks of Liverpool Street station. Because of the St Pauls heights policy, they had to build diagonally over the tracks and then they had to squint it all - which is why it looks so spiky. But in my mind, it’s old fashioned office space and it’s letting 30,000sq ft of floor with no columns and straightforward span. But it’s letting. I don’t know what the incentives are, I don’t know if they’ve got 10 years rent free period or whatever. But in this market, those buildings, which have only just been completed, are letting and I don’t understand why.

Richard Kauntze

On the economy, it clearly is very bad; my view is that it’ll get significantly worse before it gets better. What happened last year is of staggering proportions. All of us must’ve been shocked by the scale and speed of the collapse of the banking system. Looking at offices, particularly in London, financial services are so dominant, it is quite staggering how it’s changed over the years. I did something a couple of weeks ago and looked at the statistics, something like 35% of all those employed in London (it would’ve dropped a bit by now) work in financial services. It’s just 3% in manufacturing. So when you’ve got this world city, one of only two genuine world cities so dominated by one sector which is on its knees, and with so many of those people working in big offices, it’s clear we are in for quite a period of change. Quite where it all goes in terms of the evolution of the office, I think we’ll have to wait and see but I think there certainly will be change.

The sustainability agenda won’t go away in my view. There has been quite a lot of talk that as the market has moved so much in the favour of tenants and will continue to move that way, that sustainability will drop o lose interest in this. But I don’t believe that’s the case. There’s a commitment there apart from the statutory requirements, there’s a desire to do better and I think that will continue. I think we’ll see some interesting developments over the years. But we’re in for a tough period, there’s no doubt that and anyone who thinks otherwise is in denial.

when you’ve got this world city, one of only two genuine world cities so dominated by one sector which is on its knees, and with so many of those people working in big offices, it’s clear we are in for quite a period of change

 


Richard Kauntze

 

Paul Finch

Perhaps I can bring Philip in on this. From the point of view of whether to do a development even in a downturn like this, there is still a market - even if it’s at the level of people downsizing and moving into a new situation with half the space. You can still have a letting market even if everyone’s downsizing. It’s a bit like trading shares: as long as there’s activity someone’s making money. And I wonder how your world is responding to this view.

Philip Harcourt

Yes, we’re in business which obviously depends on volume of transaction not value, so we don’t care what happens to the value theoretically because we want to be where the volume of transaction is stimulated - that’s how we make our money. Looking at this recession it’s completely different from the one we saw at the end of the ‘80s. That one was bottom up whereas this one’s top down. Starting with the banks it’s percolated down. I remember a conversation in 1988 with a QS firm. Someone said, ‘Who’s going to occupy all this office space we’re building?’ No one at that stage had really stopped to think. It was just, ‘get consent’. If it’s residential, get a change of deed so you can put offices on there. If it was industrial… it was just driven by offices, offices, offices. We were in a huge oversupply of offices. The only difference is that the money supply never dried up, you could have been paying 12 or 15% finance and development. What you can’t factor into development appraisal now is the fact that there isn’t any money. Or there might not be. Or if there is money you might have to find 40% as equity and people aren’t geared up. We’ve gone from having to find 4% of their development costs to finding 40%, in a year.

It’s impacted on the whole development process. The fact that happened early is quite good, it’s sapped the supply. There are schemes that, had the money been available not withstanding the recession, might have been going ahead and would’ve now been nearing completion but which 12-15 months ago people were like, hang on, we can’t plant the amount the banks are demanding, so we’ll just step back and think. So you’re right, fundamentally there is demand, people need to shift, and large requirements still come into the market every day albeit a large number of them are for a growing plethora of other sector organisations. There was this announcement yesterday that infrastructure commission are going to be locating in Bristol, and I’ve been based there sometimes and I know that the office market there will take it for granted. But on the other side, developers like Castlemore with big schemes, suddenly having to stop work. It is quite different. We are going to see transaction; we’ll just have to cut our crop accordingly.

Paul Finch

I see the EU’s doing its bit to help by locating the centre for innovation and technology in Budapest.

Maxwell Hutchinson

Well it helps Budapest! Why do we need offices anymore? Looking back on the days that Roger and I were training, we remember conversations at the Architectural Association where we said we wouldn’t need offices by now. First of all there was the vision of the paperless office, ho ho. We didn’t know about fax machines, mobiles, emails, computers; we’re forever optimistic. Architects believe these things will eventually come, if we can get someone on the moon then we must be able to have something like a mobile phone. And then we got the idea that we would have the electronic cottage. The idea that we would all go and live this bucolic existence and we’d have lots of children and dogs and horses and we’d work perfectly happily from home and we wouldn’t need offices at all. I went to interview this man who lives in the middle of nowhere in Sussex; he generates his own electricity. He’s a NASA space scientist but never goes to NASA, he’s never been. He communicates entirely electronically with them. He does live in the electronic cottage, it works for him. I think I do know the answer to my rhetorical question, but I’d like other people’s views on it, about why, given the technology to do anything we want, anywhere, why do we all need to go to offices?

Richard Kauntze

I think Max for most of us we just like being with other people. Although office manifests itself in all kinds of different ways, I mean, this restaurant is functioning as an office while we’re here. We’re eating, but we could do this virtually, technology allows us to do all kinds of things, but we’re social beings and we like being with other people.

Maxwell Hutchinson

You’ve answered my question, because I think the future of offices is that they should become social spaces. They shouldn’t be rows of serried desks they should be places where people go to work but in a very, very organic and flexible way. I made a programme about that advertising agency called St Lukes; they’re the people that represent Clarks Shoes and IKEA, etc. Their offices is open 24hrs a day, the centre of the office is actually their restaurant canteen, you can eat at any time you like, provided you do the work you’ve been given you can come and go as you please, you can sit where you like and it’s a decidedly social atmosphere. So everything you’ve talked about, the human need to come and interact, is fulfilled, as is the work requirement, but in something that we wouldn’t normally recognise as an office.

I think the future of offices is that they should become social spaces.

 

Maxwell Hutchinson

 

Paul Finch

But Charlie, you’ve got a perspective on this about where people choose to work, and it’s not necessarily city centres.

Charlie Smith

Well there are two scenarios. First of all we do a lot of work up in the north east for oil companies in Aberdeen and they went through a huge metamorphosis in terms of how they operate in their buildings. They used to have cellular offices - that’s going back maybe 20years. Over the last 10 years they’ve moved to open plan offices. The most recent offices we’re building for end users, there’s meeting rooms for 700 hundred but only 500 people who will use the building day to day. Team-working, group decisions, sharing ideas, sharing information - that’s how end users in the north east, certainly in the oil industry, are now operating.

Philip Harcourt

They’ve tried other things that’ failed haven’t they. BA, some years ago, with the new Heathrow design, no one had an allocated desk. You just rocked up and you sat anywhere. But they found they were shedding staff. There was a survey done in the States about staff retention by one of the big recruitment consultants and the single most important factor of staff retention was not all the issues of pay, or benefits, it was ‘my best friends are the people I work with’. And what BA found was that you didn’t actually make any friends in that environment. So there was nothing to keep you there so when a better offer came along you up and left and went there. They had to restructure how they thought and bring people into this group working so that they developed relationships in the office which actually kept them there.

Maxwell Hutchinson

So you’re saying my model doesn’t work?

Philip Harcourt

Well that is I think the fundamental problem. But look at the new Microsoft model for their new office where they’re encouraging families and kids to come to work. They’re putting in crèches and gyms which I think is great.

Maxwell Hutchinson

That’s my model. The social model. So I think it’s going to take time to evolve. Somewhere like Microsoft is a great place for it to evolve. I don’t see it necessarily evolving in your typical UK government department.

Roger Zogolovitch

What’s interesting is if you look at Frank Duffy’s first book that he wrote on the philosophy of the office which now much be 20-25 yrs old, that book, it’s totally convincing. I don’t think anyone round this table would actually object, or find fault with his analysis. What then is to me totally strange, equally if you go 25 yrs later you can name on one hand the buildings that actually follow that philosophy. I think when you analyse those buildings, they are buildings where there are owner occupiers. And therefore, if it’s Microsoft, or if it’s … or if it’s an advertising agency, they’re in control of their own destiny and saying this is the way we feel. Ok sure there’s social space, you need to have character space and rooftops and all that. Then you can actually drive that model. But what we have, we still have the industry dominated by developers who build speculative office buildings. As a response to that, that office building has to be a dumbed-down product. It has to be everybody’s product.

Maxwell Hutchinson

But they are building for institutions.

Roger Zogolovitch

Yes but when we say we’re building it for institutions I think we have to stand back from that. They build it for a continuous stream of income and it’s that that is then brought on by the institutions.

Richard Kauntze

And the flexibility as well.

Roger Zogolovitch

But also it’s not just the flexibility. It’s all the growth, because an institution is speculating. In the old terms if we’re buying our 25 yr leases, OK. If we go back to the fundamentals of institutions, that was Norwich Union saying, ‘ICI, we’ll take this off your balance sheet because we think you’re a reasonable covenant so we’ll actually do a deal with you’.

Tony Burton

On that point, ‘building for institutions’ - what does that mean? What we’re actually saying, through the 80s and 90s, is that we’re building it for the institutions, they’re the people who are investing, they’re actually putting up the money to build these things – but that model is broken. I think it’s completely broken. So we’re not building for institutions any more because institutions aren’t investing. And with the developer clients I’m talking to at the moment, none of them can make a return on the old models. So what we were doing is going back to what they need to do to make some degree of return. What is the product that goes to your market to make that return? What are the rents that go with it? And actually we’re in unchartered waters - we don’t know. But it’s not the building we put up last, two or three or four years ago. It’s something different. The game has changed completely and how we then choose to occupy and use those buildings follows from that, because you know, I’m a money guy not a creative guy. But at the moment there’s nothing being built because the model that we’ve lived with all of my working life is broken.

 

The ‘building for institutions’ model is completely broken. So we’re not building for institutions any more because institutions aren’t investing

Tony Burton

 

 

Richard Kauntze

The other thing is, what does covenant strength mean anymore? I mean, when Lehmann Bros collapsed in Sept last year and there was this –

Roger Zogolovitch

Blue Chip covenant –

Richard Kauntze

Absolutely! When Canary Wharf signed to Lehmann Bros, short of the government, you couldn’t get better than that, they were absolutely safe. They go, and so the banks are shocked, they’re worth nothing so everyone is thinking what the hell’s going on here? How long do we sign for, what can we provide, and so on. The rules of the game absolutely have changed. But I think developers will still always want to have a flexible product. And when you look at something like BA and Waterside and so on, the pioneering buildings that did change in all kinds of ways, that was where a big corporate client often wanted to make a statement and do something quite radical. And how many commercial developers not knowing what’s going to happen round the corner are going to take those kind of risks with something that’s pretty offbeat? I don’t think they will.

Paul Finch

I think that’s the interesting thing because the BA model, that building could have worked equally well if everyone was assigned a desk. That’s the interesting thing. So that was a kind of facilities management decision about the operation of the building, not the building itself but what the building did, with the shopping street and so on. The building was fantastically popular with staff, they all loved the building, but they didn’t like the randomisation of desk which is much more a creative’s thing. Advertisers, and those kind of people, they come in at two in the morning. If they’re working at two in the morning they really don’t care where they sit. As long as there’s a bar!

Maxwell Hutchinson

Well think about the BA building, it wouldn’t have worked where it was without that shopping street, because it’s a desert outside. Like the SmithKline building, it’s another one with a shopping street and restaurants and bars and things, and it only works, people only go there to work, because they can go there and stay. BA has got private buses that take people to public transport.

Paul Finch

What I’m wondering is, maybe let’s bring Colin in on this and Tony, what are the implications for leases and the way leases are structured, even at the banal level of using a building for 24 hrs as opposed to 9-5? Are there implications about new ways of new ways of working that might have implications for the lease structures and therefore the investment value? And secondly, we can all see that if we do buildings that are more shell and core rather than fully air con and all the rest, we can see where the savings might be, but is there a cost of providing very flexible space which people can fit out any way they want that is also measurable? Let’s start with the law.

Colin MacLaren

Well I think the interesting thing for me is that you add covenant to the risks that were not perceived as risks with your Lehmann Bros example. That was fundable on the basis of covenant. If covenant is no longer at the top end of the given, how are you going to fund anything even if you come with a user? For offices as well, we’ve just done an office move so it’s been interesting how we went through some of the things about changing working practices, changing the type of facilities that you put in your building for staff.

The creative versus the professional is an issue as well in terms of, you know, if you’re selling hours and time you need people at their best doing their activity. So the type of office that you create will be different for different sectors. But the big problem is the funding one. In lots of ways what industry and business needs is a more flexible lease structure, where you can come into a building, you can sign up for six years, knowing that you can get out without a huge exit cost and you can move onto either a bigger building or a smaller building depending on where you’re taking your business.

One of the biggest problems is, having done this for a number of years, our legal leasehold structures are completely restrictive of business development. Somewhere in the mix of all this for me, is what we’ve got to do is try and create a legal structure and a funding structure which motivates businesses to grow and move and use space in different ways as their business develops and not be constrained in a building for 15 or 20 years where the prospect of moving is just a real barrier to business growth and development. So I don’t know if that’s answering the question you asked…

Paul Finch

It certainly has, that question of flexibility. Now if you could take that on, if you had flexibility of legal arrangements and lease structure, if you then insert that idea into the office building itself, what’s the price you pay for having a very flexible, super adaptable structure and servicing? You know, the white collar factory.

Tony Burton

How long is a piece of string? I think that’s spot on. I think the structures that we’ve got, the lease we’ve got, which is a long lease (which is atypical when you come into Europe for example, much shorter lease structures in Europe), where breaks are maybe once, twice if you’re lucky, during that lease period. The flexibility for a business to change within that period is very limited.

Colin MacLaren

Do you think that, with the difficulty of funding, we’re kind of new to this environment with having to negotiate with clients as to what is an acceptable way, what are their requirements for putting up any money at all. It’s not just huge slugs of equity that haven’t had to be provided. It’s now de-risking to a level that is almost unachievable.

Tony Burton

If I can go through my working career which spans 30-odd years, when I first started working in London, almost all the office developments in London were funded by life and pension funds. Clerical medical, Scottish Widows, Prudential. They were all funding. And they went through a period of time when they literally ran away from property in their portfolio. Enter the banks, a completely different model, a different financial model and we are where we are. The model that the life funds were looking at is a long term investment and wasn’t fast buck. A building that’s occupied by multiple tenancies that’s capable of being let and sublet, even, let’s forget lease, occupy and license, and there are examples of buildings that are occupied on license, lower rental levels, more churn in the building, but they’re making good return for the institutional investors who put their money into it. I think the model will change.

Roger Zogolovitch

Well I think there’s something else that’s fascinating that follows from Richard’s point. Once the banks go, your whole covenant structure disappears with it. You can no longer have a structure which is based upon prime yields if the prime has collapsed. I don’t actually agree with Tony, I don’t think the investment market has disappeared because people still need to invest, and there are only five elements you can invest in and real estate is one of those. So in a way, it’s: ‘What are the new products that are going to meet the requirements for flexibility?’ As a speculation, I think there’s now a complete difference towards mixed use in the way in which we inhabit our cities. Mixed use environment, you only need to look at the Crown Estate and you see how well they’ve actually managed to deal with what is a mixture of portfolio when they’ve come back into it and they’re now looking for another long term, and Crown Estate terms may be for another hundred years. But they’re actually looking at their entire asset portfolio and saying, ‘for mixed use what we need to do is improve the liveability, look at the public ground, we need to make sure we’ve got the retail working with the office, and both working with the residential.’.

Would you say that actually that kind of idea holds well throughout all of our city centres? Because if we say what’s the attractive bit of our city centres, what attracts office users, what is it that their workers and people who actually make their money want to do. If they’re working long hours and they’ve got families they need to go shopping, they need to get on with their lives. You need to have an office where people are coming in and they can sleep the night - that’s called an apartment. It’s not some revolutionary thing, so in a sense you say, ‘If the feature of the new office is incorporating other bits of city which have all these different uses, what does that give you?’ Because nowadays residential is a stream of income, hotels, apart-hotels, they’re all income streams. You get a multiple stream of income which in a way replaces the stability, and that gives you some kind of stability.

Is there then a product, e.g. a REIT product or something of that nature that will allow those streams of income to come together and actually allow the institutions to come back in – as well as individuals. That’s the beauty of the REIT structure. I can go along and put in £10,000 that I want to invest, I don’t have to stick it in a deposit account and I can participate because I like that bit of Glasgow where that building’s being placed, or I like that bit of Reading or I like that bit of Aberdeen or I like that bit of wherever. I used to come from there or I lived there or whatever. And therefore I’m emotionally involved.

Charlie Smith

 You’re absolutely right about mixed use being the right way for cities to develop. We’ve got an incredibly interesting model in Aberdeenshire that’s going on now. In Aberdeen a high cost office would probably rent at around £30 per sq ft. And that’s a high price. What is happening in Aberdeen is that people have decided they can’t afford to pay that price. And they’re no longer building office buildings in the city, they’re moving into Aberdeenshire, because the shire is making land more readily available, at a lesser cost, with greater areas of car parking available and people are able to build shared as opposed to higher quality specified offices. Colin knows when I say ‘West Hill’ (in Aberdeenshire): it’s become a huge area of offices, all service companies, principally in the oil industry. And they’re building these things and renting them back for £20 / £22 per sq ft. And it’s good quality shared office space which is dunting the BCO a bit in the head.

But we’ve now Aberdeen we’ve got a sort of city inversion where everyone is now moving from the centre of our city to the shire and once they’ve established a workplace in the shire they’re then buying their houses out there as well. We’ve got Marks & Spencers opening in the shire, we’ve got supermarkets opening in the shire and everyone’s moving out the city, exactly against what the government is trying us to encourage us to do in mixed use.

Richard Kauntze

Well that’s the fundamental thing – your point Roger about what else is around, I think that is crucial. We talked about BA and the Waterside building and the concept of the street that was so successful and used elsewhere, and your point Max that they had to do that because there’s nothing else around. Unless you’ve got it there in the building, the chemist, the drycleaners, the post office, and the café etc, what else are you going to do, who would want to work there? But to me that is absolutely crucial for any successful environment because people want and need those services to lead happy and sensible lives.

Tony Burton

 The driver that’s moving people to the shire is 10-quid-a-foot less rent. The business decision is 10-quid-a-foot less rent. What’s interesting, last week before I came out here, and it’s been reinforced this week, there are two provincial cities that we’re acting for the city centre’s regeneration, where the city is underwriting 70 percent in one place, and 80 percent of the planning application costs because they are fearful of the death of the city centre to the extent of the growth of the shire.

Paul Finch

At a London development agency breakfast I was talking to Julian Barwick (joint managing director of Development Securities) about our current condition and we both agreed that we’ve got to have a complete reversal, section 106 has got to be turned into section 601 where the local authority puts up incentives to developers to undertake socially and economically necessary activities. It’s a bit of a joke just saying it’s got to be a reversal, but it’s starting to happen isn’t it?

Tony Burton

It reinforces what I’m saying here. Those were two projects that we’ve been long associated with and there’s been a big reversal in the structures of those projects in the last week. When I met with the local authorities yesterday, they said, ‘We’ll put the land in for free, in the future expectation of some return, because we need this development.’. It’s not about 106, it’s about the necessity to do that particular development.

Paul Finch

If you haven’t already been to it, go and look at the Croydon stand, it’s a very interesting story, they’re doing a very extensive mixed use regeneration, mixed use in the sense of different building types in central Croydon. They’re working with Jones Lang, they’re creating a special projects vehicle (SPV). One immediate big bonus for the council, they don’t have to go through EU procurement procedures because it’s a private company. Next, they’re putting the sites in and they’re putting in money to get things off the ground, and there’s a matching ratio so if the value of the land they’re putting in is £10m then John Lang have to put in £4m and so on. So they get the whole thing going, it’s all structured in advance and when the SPV is broken up which could happen on an agreement basis at any time, they get themselves a partner. Or if it winds up after 25 yrs, everyone gets their take out, everyone’s happy, it’s public/private, but the point is the public’s putting in a lot up front, it’s not just the land, it’s also some funding as well to get the whole thing ticking over. If the private sector can’t do it because it can’t get the money on the basis of its own company then it has to have the covenant from somewhere and what the public sector can provide is the covenant. First of all they’re not going away, secondly it’s land.

Philip Harcourt

 There is another major advantage of this scheme (we’re working with John Lang on a number of these) and that is you’ve taken all that development land out of political control. One of the big problems with local authorities is, they’ve got a site and they say, ‘We could sell that site’ and some councillor will say, ‘Oh no we could put a children’s play area on there or we could do this or that,’ and suddenly it’s a political football and it sterilises development. With this whole model, the one big advantage is it’s an SPV, it’s totally outside of the politicians’ control. It’s an agreement between the development partner and the council that the development partner call the shots on what’s going to be developed, the politicians don’t have a chance to stand up and say, ‘oh no I don’t like that, I remember Mrs Miggins used to walk her dog there in 1943 and I’d be devastated if there was a building there,’. You do get all the most banal sorts of things.

Maxwell Hutchinson

I had a call this morning about a scheme that I’m designing at Hanover Square. We’ve been trying to get a meeting with Westminster Council and they charge £2,000 for a consultation. They rang this morning to say, ‘We’ll come and meet you on the site but we’re going to waive our fee because we want this to happen.’ It can’t carry on. I’m not going to go to city hall in Victoria St and pay £2,000 to for an unqualified person to give a view on my building that’s completely uninformed and invalid.

Tony Burton

 My perception is that there’s a certain sea-change. Within a matter of weeks this has changed. We’re hearing local authorities saying exactly the same thing, ‘We’ve got these schemes that are important for us, we must make them happen, and we won’t charge fees.’ 106 becomes 601 metaphorically. It has changed. Now that may not help the private developers per se, if the out of town development is effectively being stymied by the council saying we want this in town. But at least it’s getting things moving, it’s putting facilities in place that people need and want.

Maxwell Hutchinson

Charlie’s model about the Shire, and I know Aberdeen very well, I did my part 1 at Aberdeen, I’ve also filmed in Aberdeenshire a lot, what’s made that happen is a very flexible planning policy by the county and the district councils. London for example, because of this wretched, useless thing called the green belt that nobody understands what it is and why it’s there, we can’t do things like that. In London, if we just free up the green belt, in one fell swoop we could liberate a massive amount of land for the sort of offices you’re talking about: single storey, low-rise, well engineered, very pleasant spaces to work. You wouldn’t have to have the double-decker lift things we were talking about at Bishopsgate.

Roger Zogolovitch

You want to litter our green belt?! (laughter)

Maxwell Hutchinson

I have no bones about it! The green belt is useless.

Charlie Smith

The green belt that this development spoke of in the Shire, and it’s no totally built out and the Shire is now looking at making more land available for the future for residential purposes.

Maxwell Hutchinson

Did you read what Abercrombie said about the green belt? It’s a whole load of platitudinous rubbish. The idea that we’re all meant to go out to the green belt at the weekend and ride horses and take our children walking, and get the metropolitan line that’ll dump us off somewhere, absolute rubbish, it’s a waste of time.

Charlie Smith

It is a good idea that the city is city. The city is for working and living and the buzz is there and the country is the country.

Maxwell Hutchinson

But Aberdeenshire’s relaxed it, and it’s a beautiful, beautiful county.

Charlie Smith

Aberdeen city is financially constrained, the city is close to being bankrupt. We are at shortfall, around £50m.

Maxwell Hutchinson

Why? You’re the European capital of oil!

Charlie Smith

But no one is paying the city any rents or any taxes. All the taxes are going to the Shire, the people that work in the Shire are tapping into the city and making use of the city but all the money’s going back into the Shire. We’re screwing ourselves over.

Tony Burton

One of the things that struck me last year at the BCO conference in Brussels, it’s not a city I know very well, but for me, we had a coach trip out to have dinner and it could’ve been anywhere. What struck me was that in town I couldn’t find the Central Business District. And on that journey on the way out to the hotel to have dinner, one long continuous road would go from a very opulent residential district to immediately an office sector, back to residential, I think it was social housing, back to high quality residential, more offices, all down this same road. (No green belt at all!) But there were quite obviously residential and working communities like little dots along that street. I suspect that those people that live close to those offices work there. They wouldn’t go into the centre of Brussels to work, most of them.

Roger Zogolovitch

That model is a standard. London is unbelievable for what I call an open weave structure, because it actually is an open weave city. The kind of opportunity of expanding it… I don’t think we need to address all the planning issues, that’s another debate, but the issues of deregulation and the constraints it has on the system, what is interesting to me is what the office will be on the other side of this recession, what is going to be an acceptable institutional standard? Because in some shape or form the institutions are still going to fund the office, whether they’re insurance companies paying, whether it’s linked to annuities, whether it’s REIT, but there isn’t going to be the stability. All the leases that we have in our portfolio, there’s no possibility of entertaining a break. I can’t do it. I’ve got charitable tenants, and the trustees of those charities would effectively not be doing their duty if they signed up to a lease without breaks. It’s not reasonable to ask it anymore because there’s too much surrounding everything to say that breaks are there. And they’re absolutely right. So how does that embody itself into a new form?

Maxwell Hutchinson

I think you’ve answered the question yourself when you said that the future is owner occupied offices. Like Microsoft, if they own their offices, and like oil companies, most of whom own their offices, they can do what they like. They’re investing their own money. Why get someone else to invest the money if you can raise the money.

Richard Kauntze

I’m not sure Max, I don’t see that.

Paul Finch

 that’s an illusion because it’s a bit like the resources that you would deploy in your organisation. It’s like publishers owning printers. It sounds fabulous, why can’t we own the means of production. The truth is you spend more time fiddling about with that. It’s a different business.

Maxwell Hutchinson

So why do people become owner-occupiers of their own?

Paul Finch

Well Max, increasingly people do not and that’s the whole point. If you look at the retail market as a parallel, nobody owns their own.

Maxwell Hutchinson

Is it the same on the continent?

Richard Kauntze

In the UK the only retailer that had a serious ownership was M&S and they got rid of it. They reached the conclusion that they’re not in the property game. Why should they be amateurs?

Maxwell Hutchinson

I do understand that but is it the same in continental Europe?

Richard Kauntze

I don’t know but I suspect there is relatively limited owner-occupation.

Roger Zogolovitch 

The most interesting difference in the office market in Europe, particularly French, is that institutional lease markets are subject to three year breaks. So it seems that if you measure across institutional performance in terms of investment they don’t seem to have suffered because it’s the status quo. The reality of breaks is that they’re very seldom used. The inertia of an occupying tenant is so enormous that the break only happens if it’s ballooned in size or whatever.

Paul Finch

And you can prove that because in a sense the system is Darwinian. The 25 year lease that people still sign, with 5 yr reviews… in living memory you had 50 year leases with 15 year reviews.

Richard Kauntze

In my experience the best, most successful office models are the most accessible ones: One that provides a clear relationship between those spaces used by office workers and those for other uses. Perhaps my favourite example is the Rockefeller Centre in New York which is a fabulous development, 77 years old this year. I defy anyone to do it better today. It’s beautifully maintained, it has complete accessibility. There is movement everywhere. There are shops, restaurants and people feel a real relationship to it. The supply side has to have that at the forefront-

Roger Zogolovitch 

You’ve got to make it live.

Richard Kauntze

Exactly.

Paul Finch

The City of London until quite recently was staid and conservative and very silo minded – they were not interested in residential or shops. But what’s happening now is that values in the City are being held because they’re going for mixed-use with a vengeance.

Philip Harcourt

Absolutely with a complete passion

Paul Finch

When British Land redid Plantation Place, and they put all the retail on the ground floor and created public access routes, it sent a kind of message: that a very conservative straight-laced developer was now embracing this new idea. Walking down Cheapside Street is a revelation – it was a medieval shopping street and its now turning back into one. But that’s not to deny offices because they are all in there. What its saying is you have to put retail in at ground level without question and all of a sudden all of those problems where people said it was very difficult disappear. It requires a modest amount of extra work from people who are paid handsomely. It’s not difficult.

Maxwell Hutchinson

what follows in Cheapside is the public realm. There is a major pedestrianisation programme by the city corporation to part pedestrianise Cheapside Street following on from what you’ve described. The City Corporation has gone, ‘Hey this works’ so they’re going to respond by creating a public realm around it. But I have to say the new public space outside St. Mary le Bow is absolutely ghastly – that was a section 106 agreement – they couldn’t control it. St. Mary le Bow was given the section 106 money from the adjoining office development but they had no control over it – its ghastly. So often, 106 money is squandered, once that money is given, the recipient has no control over the money.

Paul Finch

The implication is that developers make excessive profit that have to be taxed. Its legalised blackmail. And it works. You get very bad developments which are overdevelopments, why because they had to overdevelop to generate money to pay the 106 . who benefits. Why?

Maxwell Hutchinson

It’s a fine. A tax for being creative.

Roger Zogolovitch

I was reading some global research on nimbyism. It was a rather terrifying read in that suggests that actually the UK has the highest levels of nimbyism in the world.

Paul Finch

We’re gold medallists! (laughs)

Roger Zogolovitch

Any new development is bad. Any kind of community engagement is nihilistic. This tick box procedure has made it impossible to do anything exciting.

Maxwell Hutchinson

Is the idea of the electronic cottage completely dead? That we no longer require to go to offices?

Richard Kauntze

I think its a complete non-starter Max.

Maxwell Hutchinson

Why?

Richard Kauntze

We just like being with other people.

Roger Zogolovitch

Actually what happened is that the electronic cottage is alive and well and it’s living inside people’s homes. There has been a rash of the home office. If you commute its completely standard that some people will come in a work three days a week in the office and two at home.

For me technology means we work in ever more flexible ways but it also means we work more

Richard Kauntze

Maxwell Hutchinson

so its alive and well…

Tony Burton

It’s a hybrid.

Roger Zogolovitch

Its not a them and us.

Richard Kauntze

It’s manifest in different ways. For me technology means we work in ever more flexible ways but it also means we work more. We all have mobile phones and blackberries. I spent all this morning talking with the office on London on matters I won’t bore you with you because my colleagues know I’m accessible.

Philip Harcourt

We’re a bit like bees and ants – we congregate together to work – but technology has allowed us to work away from the hive.

Maxwell Hutchinson

We work longer but not necessarily harder. Charlie is designing an office for 300 people that actually caters for 500 –

Charlie Smith

 The meeting capacity is 20 per cent more than the seating capacity for the office.

Colin MacLaren

That’s what BP did for the European HQ. They designed their building with hot desks because they accept some of their staff to work from home for a couple for days a week.

Charlie Smith

They’ve factored that into their traffic plan – they’ve said, we’ve got an office for 600 but only 400 will use it at any one time.

Richard Kauntze

Until recently you had the war for talent. Employers had to fight for the people they wanted by offering them all kinds of flexible arrangements otherwise they wouldn’t get the people they wanted. They didn’t have much choice.

Paul Finch

It’s rather like the idea of the paperless office. Just because it could be done doesn’t mean everyone will, or should, do it. Its an attitude to life: is life messy or is it organised? For some it’s messy for some it’s organised. There’s no one size fits all. We ought to know better than this now. Just as the whole modernist programme was predicated on minimalism, there’s nothing out of place, there’s no rubbish, you never see any children, but we all know it’s just not like that generally.

Philip Harcourt

The paperless office was conceived long before there was a computer on everyone’s desk. I used to dictate letters to a secretary and it was produced correctly first time but now we are tempted to go back and re-edit any number of times because we still haven’t learned how to proof on screen. So it’s generated more paper really because we still want a hard copy.

It comes back to the question: why is a business forced to make a commitment on how much office space they will need over a 25 year period? It’s ridiculous. Would you go to a business and say: ‘you’ve only got one opportunity to buy company cars, and you have to but them today and you have to buy enough to last you for the next 25 years. And its the same with computers and everything else.’ But for the most expensive investment, the office, they’re asked to commit for 25 years. It’s a huge dilemma.

Paul Finch

The only parallel, is signing cleaning contracts for 25 years in PFI projects. But its not about maintenance really, these are tradable contracts, income streams really.

Lets get predictions round the table – in five years time, when we come out of this thing, whatever it is, what do people think might be the scenario, the scene in five years time. How different or how similar will it look? Roger will it be recognisably the same market?

Roger Zogolovitch

I think the investment market will have to change quite radically. It has already absorbed a series of new models. Its absorbed business parks. There was a time when business parks were not allowed to be investment grade material. I think the strength of the market I am convinced, is through mixed use. If you’re speculating about the future you have to think about urban residential.  It has been consumed by the buy-to-let mortgage and the flood of cash which came into the market which we now know was quite suspect on a rising asset bubble. What’s interesting though is that actually is that a lot of buy-to-let is occupied. So there is another set of tenures which actually want people to occupy at the centre of our cities. So I think we’ll now start to get to another kind of institution, some kind of structure or instrument, which allows elements of our city to have different streams of income. Somehow this will amalgamate to allow us to have different kinds of tenure and ensure the product remains popular.

Maxwell Hutchinson

I think recycling is interesting. Let’s start looking at buildings that may not be office buildings that you can recycle as office buildings. Minimal planning consent is required. The out-of-town model is interesting. The Metropolitan line generated new communities because they built the stations before there was anything there but bought all the land around and became housing developers. I like the idea of the electronic cottage but diluted – because we all quite like to see our mates from time to time. So I’d like to think offices are much more social spaces. I also think the work ethic will be eroded by what’s happened. It doesn’t make any difference about how hard you work, the system still collapses. Get rid of this stupid work ethic! This summer is going to be baking hot. We should reintroduce the siesta! I’m totally against people working more than 7 hours a day.

Paul Finch

I think a lot of practices are going to sign up to the Archial banner!

Maxwell Hutchinson

We should be eroding this artificial culture of overwork. The future is about the integration of families, a social integration, and the erosion of this Teutonic work culture.

Paul Finch

At the BCO conference in Brussels there was a lecture by a very brilliant man from Harvard who explained where the retirement age of 65 came from. It came from the Prussian railway system where they had to decide when they should retire train drivers. They chose 65 because they were either dead or were no longer physically strong enough for the job by that age. So the entire western world’s pension arrangements stem from this almost arbitrary single point – proof positive that chaos theory is alive and well!

Roger Zogolovitch

We are a competitive lot - its the human condition. That’s why we work so hard.

Charlie Smith

There will be more provision of meeting, social and interaction spaces. I think the electronic village will become more prevalent

Colin MacLaren

I think there will be a regression in the way leases are put together. And I hope Max is right but I have a sneaking suspicion that the hard work culture is going to a bit worse and embedded a bit harder because all businesses are slimming down, people are going to fight even harder to keep their jobs, show their worth. I don’t foresee things becoming easier.

Richard Kauntze

I’m half with you. I love Max’s model but unfortunately its not going to happen. I dream of my afternoon siesta and shorter hours and all the rest of it but I just can’t see it.

Maxwell Hutchinson

Reasonable hours not shorter hours

Richard Kauntze

Reasonable hours. I’m sorry Max.

Paul Finch

But we all know it is going to happen for Max!  (laughs)

Maxwell Hutchinson

You can all come and work for me!

 

It’s the only bowler hat in France. And one of the few bowler hats in London. Thank you to the AJ for organising it and thank you for all coming.

Maxwell Hutchinson

Richard Kauntze

If only we could Max. But I think what will happen is that Roger’s mixed use point is absolutely right and we’ve talked about that in the city and so forth and I think that is a resurgent force and I think it will absolutely power ahead. But I think quality in everything lasts and we’ll see that in the office too. If there’s thought and consideration and imagination and ambition it will show and we shouldn’t underestimate the office sector in its broadest sense the whole family in the office world to reinvent and come up with a new and successful model. We’ll see offices manifest themselves in different ways. Your point Paul about the institutional structure we will see change there. When you look at the BCO specification in its first edition in 1993 it changed the game because the institution said, ‘Well that does make sense after all - we don’t need to put in these ridiculous requirements for floor loading and all the rest of it we can come up with something more sensible and it will protect our value and we will see significant change.’

Maxwell Hutchinson

I’m going to have to go and hot desk now. I’m chairing another discussion.

Richard Kauntze

Enjoy your siesta!

Paul Finch

Good waistcoat Max.

Maxwell Hutchinson

It is good. Tomorrow’s is quite good as well although the colour is not quite as good.

Richard Kauntze

That must be the only bowler hat in Cannes I think.

Maxwell Hutchinson

It’s the only bowler hat in France. And one of the few bowler hats in London. Thank you to the AJ for organising it and thank you for all coming. Let’s get rid of this obsessive work culture and the introduction on the siesta.

Tony Burton

A huge sea change in the bonus culture may start to readdress the work life balance. And by reducing remuneration you can increase employment and improve the work-life balance: Get seven people to do what one person was doing for £1.4m, at £100,000 each with a £100,000 bonus on top of that and you get the same work done in one seventh of the time for the same price and a much better impact on the community as a whole.

Colin MacLaren

Is bonus culture broken and changed as well? A lot of it got driven up by the perceived lack of good people. Bonus was driven up by trying to keep hold of this pool.

Richard Kauntze

The extraordinary thing about the banking collapse was nobody had any idea about what was going on.

Paul Finch

To go back to previous property collapse, in terms of scale this one is unprecedented, but in terms of fundamentals, it isn’t. Anybody who remembers savings and loans from the 1980s it was essentially the same. Money being thrust at poor people in America with no hope of ever repaying it and the people who were shovelling it were getting bonuses based on how much they lent to these no-hopers. In fact it cost the American economy, its taken them until about now to unwind all the debts – they were so huge the government had to take it on – $53 billion - not great compared with today’s figures but its essentially the same thing – thrusting money at people who can’t afford to repay it. But what happened to the money? It had to go into the economy but where did it show up?

Philip Harcourt

Into the pockets of rich people. I sell my house to a poor person with a mortgage from the bank of no hope, pocket the cash and he goes into debt. Te financial model has to change. Enough fingers been burned for it not to change. We have to go back to a more cautious financial environment. It we get it right and we learn from this it will be a much more stable world.

Paul Finch

In terms of offices, a new sobriety about the market?

Philip Harcourt

I think there’s going to be a variety of different offers coming to the market. We will see recycled buildings with improved sustainability ratings and they may have a rental level lower than new builds.

Colin MacLaren

Some of that will be quality and price driven because if you’re recycling which will happen then presumably you can offer that on the market at a lesser rent – it’s cost you less – and offer shorter licence periods. I had a meeting just yesterday, it was quite interesting because he turned the whole argument of duration on its head – he was in offices and retail – his view was never give a tenant more than one years lease. Because if its works for the tenant, he captures the tenants good will. The notion of giving someone a one year lease was very interesting, as a way of managing your property assets.

Tony Burton

There should be the opportunity for both sides to pause and take stock of that ongoing lease.

Paul Finch

We’re just moving away from one size fits all to bespoke offerings. What is a healthy vacancy rate? 15 Per cent? If you get down to ten you’ll have a supplier’s market only. Let’s say a healthy market is 15% vacancy rate – you could build a lot at that rate.

Roger Zogolovitch

Office rents can move as quickly upwards as they can downwards. Because there’s a churn rate. I remember the dotcom boom there was desperate need for office space to set up companies but the space wasn’t there so any vacant space was suddenly priced higher.

Paul Finch

There was a funny headline in MIPIM news yesterday, ‘London relegated in world rent table’ as if this was a disaster. They could have written it as ‘better deals for tenants in these hard times’ and actually there’s still an instinct that this is a supply led market and this is the only thing that matters.

Richard Kauntze

I couldn’t agree more. With this revision to the guide, it will be the last hard copy, it will be revised every two years electronically. There needs to be a mark in the sand so we all know we’re talking about the same thing, but it will be updated much more regularly.

And we’ll make reference to innovation. If something happens with lifts, structure or whatever it may be we will refer to that electronically and users can see what BCO is saying and perhaps considering for the next update.

Paul Finch

Thank Archial for supporting this lunch and for everyone for taking part. I must say, fabulous food!

 

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