HAS the office market in Scotland put Covid behind it?

Given the series of major investment deals and lettings that have been announced in recent weeks, as well as statistics pointing to steadily improving occupancy rates in our three biggest cities, it is tempting to think the market is in full recovery mode.

The business pages of The Herald have this year reported on big transactions involving new and high-quality developments that would suggest companies are envisaging a future in which their employees are spending a significant part of their weeks in the office – and not working full-time from home. And environmental considerations have been placed very much to the fore of these new developments.

In Glasgow, 177 Bothwell Street, one of the few speculative Grade A developments to come out of the ground in the city in recent years, changed hands for £215 million in a deal that became public April. The deal vindicated the investment made by HFD Group, the Scottish property company, to develop the 315,000 square foot building that has already convinced big names in the business world to take space even before it is finished.

READ MORE: Scott Wright: Fears of slew of bar and restaurant failures across Scotland

Virgin Money, BNP Paribas, AECOM, CBRE and Transport Scotland, as well as HFD itself, have pre-let space at 177 Bothwell Street, which was acquired by Pontegadea, a Spanish investment company. That the property, which is expected to be one of the most sustainable in the city, has been sold to a buyer from beyond these shores indicates that Scotland remains an attractive destination for overseas investment, following a period of disruption during the pandemic when buyers were unable to travel and visit sites.

“Of course there is a lot of macro uncertainty around generally, and volatility in the financial markets,” said Basil Demeroutis, managing partner of FORE Partnership, the property development company that has just built the sustainability-focused Cadworks office block in Glasgow city centre.

“But the UK is seen by investors as a safe haven, and strong regional markets like Glasgow are particularly attractive, where there is a shortage of high-quality, sustainable office space.”

That shortage of high-quality space would appear to be spurring a flurry of activity to refurbish existing building stock across Scotland. Planning permission, for example, is being sought to revitalise an office block that dates back to the 1970s at 150 St Vincent Street in Glasgow.

READ MORE: Scott Wright: Struggles of historic Scottish retailer hammer home challenges facing economy

Thomas & Adamson, the Edinburgh-based construction and property consultant, has been appointed by Clearbell Capital to work on plans that involve developing 152,000 square feet of Grade A office in a building currently spanning 69,000 sq ft over seven floors.

“Quality workspace in the right areas continues to attract tenants and to generate good rental income,” said Nick Berry, partner at Clearbell Capital. “Glasgow has long been a centre for business and is bouncing back from the impact of the pandemic.

“As well as improved office space that allows collaboration and connection, tenants are demanding strong ESG (environmental, social and governance) credentials too. We are seeking to create one of Glasgow’s most sustainable office spaces, and to create a workplace for the occupiers of the future.”

That such activity is taking place underlines the strong demand from businesses for quality office space in Scotland. Such demand can be illustrated in Scotland’s capital city, where a host of major companies have agreed to take space at the new £350 million Haymarket Edinburgh development. Legal giant Dentons, Deloitte and law firm Shoosmiths have committed to space at Haymarket One, which is the first office to be released at the sprawling site that is being delivered by M&G Real Estate and Qmile Group. Haymarket One spans 100,000 sq ft of Grade A space over seven floors.

READ MORE: New Glasgow office development sold for £215 million

Back in Glasgow, the £30 million Cadworks building, which was completed in December, is now 50 per cent occupied, after major tenancy agreements were struck with Ovo, the energy company, and law firm TLT.

However, while there are indications of office occupancy recovering, following the huge shift to working from home at the depths of lockdown, there has been a discernible change in the types of space that are now in demand. Companies are searching for higher-quality offices that have more areas for colleagues to collaborate, and are more suitable to a hybrid model, where people do not have permanent desks.

Increasingly, there is also a demand for buildings that are kinder to the environment. Indeed, David Cobban, head of property firm Savills in Glasgow, warned in an article in The Herald last week that properties that are currently energy and carbon intensive could see significant reductions in their values.

“It feels like a two-speed market,” Mr Demeroutis at FORE said. “Tenant demand for low-carbon, socially impactful office space has never been higher. But that represents a very thin slice of the market. Rents are rising at this end of the market, but for buildings that fall short in their ESG values, the market is being far less kind. I think we’ll see this accelerate as the manufacturing cycle for new space is measured in years. We just can’t create enough sustainable office space fast enough.”

These dynamics are being played out against the backdrop of an acute cost-of-living crisis, with soaring energy prices driving inflation to nine per cent in April – its highest level since 1982.

With the cost of travelling to work and buying lunch, for example, continuing to rise, and the current disruption to rail services in Scotland, it may well be that some people seek to put office life on hold for the time being.

Mr Demeroutis said such factors are “part of the mix” in the working-from-home debate.

“On the flip side, so too is the crisis of connection and pandemic of loneliness, and the social forces that are drawing us together in our cities after two years of imposed isolation,” he added.

“We absolutely need to solve the cost-of-living crisis, as the longer it draws on, the more it will defer this vital 'great reconnection' and inflict social as well as financial harm.”