Is the commercial property sector facing a long-term decline in demand for shops and offices?

The government has announced it is going to put as many services as possible online in the next few years. Ministers and their advisers are currently drawing up plans to move the delivery of services relating to passports, job centres, benefit offices and town halls onto the internet. Tens of thousands of public sector jobs could be ‘streamlined’ as a result. This highlights a growing trend in society and suggests that we might already have enough shops and offices for our future needs. Modern life is evolving because technology is forcing rapid changes to the way we work and the way we live and this announcement to cut jobs in public services by automating processes and putting services online is only the tip of the iceberg. The internet is to 21st century industrialisation what the production line was to 20th century manufacturing.

Ever since dotcom euphoria started to take hold and online business began to look like it would change the world people have been claiming that the end of bricks and mortar business is in sight. We got slightly ahead of ourselves by a decade or two but things are changing rapidly now, driven by the need to cut costs, better technology, widespread wireless communication and a need to adapt to a new generation of adults that are completely at home in the virtual world of instant messaging, social networking, text messages and online commerce. These changes, at the very least, raise the question: how many more shops and offices do we really need?

According to a recent report commissioned by the British Council of Shopping Centres, one in five shopping centres in the UK are at risk of defaulting on loans, which suggests that demand for new retail space is weak whilst supply is still growing. There has been a huge amount of new retail space built during the consumer boom and this has continued to some extent during the past two years as lead time from planning to completion is quite long and shopping centres such as Newcastle’s new £170m mall that was opened in February this year will have been conceived before the UK went into recession. By mid-2008, just as the downturn hit home, the rate of retail space development was at its highest for 40 years. Some developments have been postponed since then and some projects have been cancelled altogether due to a lack of financing but there is also a drop in demand from retailers who are experiencing a downturn in consumer spending. It is possible that the nationwide volume of retail space when combined with the potentially long-term effects of the financial crisis could mean that we have sufficient supply for decades to come.

The huge expansion in personal loans, leasing, equity release, credit cards and mortgages in the years leading up to the start of the financial crisis has created what could turn out to be unnaturally high levels of consumer spending, especially in the UK. We are now seeing an increase in the savings rate as households attempt to unwind their high debt levels and this will have a negative impact on retail spending overall whilst it continues. This level of spending might fluctuate in the short term but for the next few years it could actually decline in real terms as consumers come to grips with weak pay increases, persistently high unemployment, reduced government spending, higher interest rates, higher inflation and higher taxes. A decline in spending power hits retailers directly and they may be forced to continue cutting costs and streamlining their operations. Past experience suggests that they will close underperforming stores and focus on improving sales from better-performing locations whilst trying to boost online sales as much as possible. The net effect could well be less need for new shops.

Technology is also having a significant impact on consumer shopping habits. According to Retail Decisions, a card payment business, online sales in the UK increased by 21% between 2008 and 2009 and up to 33 million people made a purchase online. There is a growing tendency for shoppers to spend their time in shops at weekends and then to make their purchases online during the week, with Monday traditionally being the busiest day for online sales. The role of shops is changing and they are often used by consumers simply as a means to physically view items before searching online for them at a better price. The rise of smart phones, such as the iPhone, and netbooks is also making this easier as shoppers are now able to obtain an online price comparison of an item whilst standing in a store looking at it. Portable widespread access to the internet is making it easier and quicker to shop around without moving and online retailers often have a price advantage because they don’t pay high rents for prime retail sites. The extrapolation of this trend, as 24hr online access and the prevalence of browser-enabled portable devices make accessing the internet much easier, suggests that online competition will continue to intensify for bricks and mortar-only businesses.

Demand for office space is another sector under threat on a long-term basis. Outside of London rents are expected to fall during 2010 due to oversupply and the public sector cutting back on workspace requirements. The need to be physically close to other people is diminishing rapidly as communication via the phone and the internet is improving and becoming more widespread. The ability to speak to people and to see them via a webcam is becoming more mobile, less expensive and of much higher quality. The idea of a face-to-face meeting between 2 people in separate cities is now entirely possible and the use of video-conferencing is expanding as it saves time and money whilst still enabling participants to read expressions and body language. Only the physical handshake is missing from the meeting.

The concept of working at a distance has been around for some time but there are certain catalysts that might cause a significant step-up in the evolution of the process. The financial crisis could be one such catalyst, especially if we see the economy drop back into recession, another could be a change in government policy such as tax breaks for those who are prepared to change their habits, but change will probably come more gradually. Advances in technology are making remote working easier and cheaper as mentioned and as companies have sought to cut costs during the recession they have reduced spending on business travel (high and rising fuel prices haven’t helped) and have looked at ways to reduce fixed overhead costs such as office space. The financial crisis has made ‘streamlining’ a priority for businesses that only needed to focus on managing expansion during the boom years and a drawn out period of weak growth could see this continuing for longer than usual.

One particular theme that is rapidly gaining prominence is the misery of commuting and congestion for workers travelling to and from their workplace on a daily basis. The sheer numbers of people moving around the country, especially at rush hours, makes the idea of working from home increasingly more appealing. The roads are already clogged up so imagine what they will be like in 10 or 20 years time if society continues on its current course. The threat of transport strikes as unions fight with employers and the government about pay rises only highlights how pointless so much commuting really is. Home working saves wasted time (some people spend 3 hours a day or more going to and from work), whereas commuting costs money, can be stressful and adds greatly to pollution. Whilst there will always be a need for certain jobs to be located in one single office, I believe it is unlikely that we will need a growing number of centralised workplaces over the longer-term when the alternative is becoming more feasible and more attractive.

I’m not suggesting that the construction industry will disappear, there will always be a need for new buildings, even as technology brings changes to requirements. For example, the adoption of the desktop computer helped automate offices but businesses also required new building designs to accommodate all the cabling under floors and through ceilings. In turn it is likely that changes in technology and their effects on our lives will create new ‘machines’ for living and working (as Le Corbusier described them). Online businesses require warehouses to store goods and an expansion in distance working could see more residential development being adapted to suit the requirement for work space in the home, but the net overall effect is that the migration of services into the online world could change the physical landscape of the country and this would have massive repercussions for the commercial property sector as it stands today.