Office rentals in Central London slumped in the first three months of the year. Data from property consultancy company Savills says there’s demand. But transactions are taking longer than expected.
The firm’s latest research showed 1.7 million square feet of space was already rented in the first quarter of 2023. It’s a solid number but far below last year’s 2.1 million square feet. It’s also less than the pre-pandemic numbers of 2019. The numbers were also 26% down on the country’s 10-year term average.
Drop in Lettings Due to Indecision
The slump in Central London office lettings appears to be due to indecision. Many companies are taking a lot longer to decide how much office space they’ll need. Businesses are also grappling with how to attract workers to return to the office. Employees are still on the fence about going back to headquarters, even if it’s only for a few days a week. Many London companies are still using a hybrid setup.
Savills mentioned a large number of deals are still in negotiations. Leasing director Andrew Wedderspoon agrees demand for space in central London is up. He said lettings for “best in class” are increasing. The entire space offered now is about 2.9 million square feet. That’s 4% more than the five-year average. But he also admits that transactions are taking longer.
This was also confirmed by real estate expert Richard Townsend. He said protracted deals are because of prospective occupiers being more detailed. They’re doing a stricter analysis of their business strategies. They’re also concentrating on how to make the most of the office space. Most of the time, they’re looking for high-quality space. It should also come with good sustainable credentials.
Good Enough Not Enough
Townsend said the “good enough” mindset is not cutting it anymore for most office tenants. They’re very centered on what their business needs. This change in focus has resulted in extensive searches. Extended transactions are another offshoot of this.
Real estate developers are projecting a solid demand for modern spaces. Take the new London office of CBRE for example. The property company’s office looks like a hotel lounge. It has comfortable seating amid the greenery. It also has a library, café, and tech bar.
This exemplifies the idea of “hotelification.” The property niche after COVID is working hard to let workers earn their commutes. The idea is to let these perks lure employees back to the office. Especially those who are now used to a work-from-home setup.
It’s a challenge though. Many employers have accepted that hybrid working isn’t going anywhere. Many small and medium-sized businesses have even ditched permanent offices.
If new or modern buildings are facing an uphill battle, it’s much worse for older structures. Their owners will have a challenging time attracting new tenants.
Banking Crisis Might Make Things Worse
Many investors are also feeling antsy about the office rental slump. The sluggish economy and high borrowing costs could mean trouble for real estate.
The fall of Silicon Valley Bank and the bailout of UBS has already added to the jitters. Investors are now concerned about the next phase of the crisis. They believe it could put pressure on the volatile commercial property market. Especially if banks curb their lending to the real estate industry. This won’t be a pretty sight considering that its global worth is around $20 trillion.
There is cause for concern though. The Bank of England once again increased its base rate last week. It’s the 11th consecutive time it happened. The UK’s central bank increased interest rates to 4.25% in a bid to rein in the high inflation.
Meanwhile, the US Federal Reserve also increased its rates. It pushed it up a quarter percentage point. It now rests at a 4.75% to 5% range. That’s the highest it has been since 2007. These moves were also predated by the European Central Bank. The bank raised its deposit rates the week before. The institution raised it by a half percentage point to reach 3%.
JP Morgan Asset Management warned shops and offices could become the next victims. Its chief executive had something to say about the Federal Reserve making a sudden stop. He said something always goes out of the windshield when this happens. He hinted that commercial real estate could be it. He said they have higher rates for property developers. But he wonders how that will affect the real estate market and the lenders in that niche.
The office occupancy rate in the UK during weekdays is 29% this year. It’s a little lower in London. The numbers are much lower when one compares them to pre-pandemic norms. It was at 60%-80% during that time.
Data revealed a marked difference from that time to now. The Office for National Statistics revealed that around 40% of UK employees work from home one day a week. It was at 12% before the pandemic. People working from home are always skewed from Mondays and Fridays. Office occupancies are often higher towards the mid-week.
These facts don’t change a company’s workspace demands. CBRE chief Simon Brown said it’s a given that most offices are empty on Fridays. He also noted that central London is more connected to global trends. It's also linked to economic execution. The city is also more fraught compared to other cities in the UK.
It’s not surprising then that commercial properties are falling in this backdrop. CBRE’s per-month index revealed commercial values went up in the first half of the previous year. It then plummeted between July and December. Any gains were then wiped out. This resulted in property values going down by 13% for 2022.