The Central London Market — Our Predictions

SHB Real Estate
Nov 2, 2020 · 6 min read

Our very own Freddie delves deeper in to COVID and its systematic change on the occupier market as priorities shift from the status quo, having both an adverse and positive effect on London submarkets.

Business districts in cities in the UK have endured major changes in demand as occupiers react to COVID, physical distancing rules and various lockdown measures. Not to mention the technological drivers as a direct impact of COVID. This to date has manifested itself in many ways, as employers migrate to an agile working environment on a semi to permanent basis, priorities continue to shift to that of talent retention to survival with a greater emphasis on health and wellbeing.

It was only yesterday, a client of SHBRE was demonstrating his irritation to working in a typical skyrise building in the city. “The days of 1,000’s of people working in large skyscrapers, may become unviable, at least in the short to medium term”, as many consider distancing guidelines affecting the reopening of buildings.

“I can’t see offices with that many people in ever again. First thing I’ll be doing is cutting down the number of people coming into the office. We’ll need less space.” — Theo Paphitis, BBC Question Time.

The consultancy’s work with banks and financial bodies had led him to conclude that even allowing for physical distancing measures, such as the separation of desks, firms now had at least 20% more office space than they required. “We’re working just as efficiently as ever although we’re all working at home. Do management staff really need to come into offices paying £90 per square foot? With service charges they’re paying £16,000 a year just for the space of each person. Then you have to add social distancing to that”.

The concern has been felt throughout London and investors pose the question, “Will our Tenants survive?”.

Even the strongest of tenants are struggling to pay rents, occupiers large and small, struggle to retain liquidity. John Lewis is a prime example of this, a household name with an abundance of pedigree, as we see them dump large quantum of space onto the second hand market, yields will continue to grow with vacancy increasing and rents slowly declining.

Vacancy:

A brief snapshot can be seen below:

· 2m sq ft of tenant release space since the start of lockdown across London.

· London vacancy rate at end of Q2: 6.1% — up from 5.7% at end of Q1

This is but the start of such stark KPI’s as we expect this to continue to climb. It’s clear companies are not just planning to pay less and reduce their office size, but also looking to move to buildings where they have greater autonomy of the immediate working environment, helping to safeguard and ensure the wellbeing of their workforce.

Clearly certain areas are better placed to react to these changes partly due to tenant mix but also type of building. These areas can be tracked via the following vacancy table below: (Knight Frank)

As we know, London has typically been underpinned by a significant lack of supply, which in turn has minimised voids and suppressed vacancy. It’s clear those days of prosperity and unprecedented success will be a thing of the past, giving way to extensive void periods, something we expect to grow to the realms of 2010 following the hangover of the 2008 crash.

Development:

A further demonstration of the current state of play is the development curve. This can also be seen to be slowing as Landlords look to preserve liquidity rather than seeking comprehensive refurbishments and/or redevelopments. Clearly, any Significant drop in development will take time to manifest so we should expect to see similar levels to 2010 we expect a Significant hangover when compared to the 2008 crash.

Values:

SHBRE alone are expecting at least a 20%-30% fall in rents for offices. Whilst this is a staggering figure, it’s important to take this with a pinch of salt as certain submarkets will react better than others.

As discussed earlier, the reason for this might be down to typical tenant mix, or more of an onus on building type. From current experience, Mayfair seems to be sustaining activity albeit at a subdued level with most occupiers favouring the finance and banking sector.

Rather admirably, banking and finance companies appear to be exploiting this time of uncertainty rather than being intimidated. Switching emphasis back to building type, a common feeling throughout occupiers is their new-found requirement for flexible COVID secure amenities, i.e. self-contained buildings, demised toilets, well thought after access and escape, demised showers, and fresh air conditioning. Something which seems to be a key issue with occupiers is resisting flexible serviced space because of the shared facilities such as kitchens and underutilised lifts.

This can be compared to areas in the City and Canary Wharf where larger, more expansive companies much like Barclays, opt for a work from home policy amounting to 70,000 staff worldwide transforming their home setups.

This downward spiral can be demonstrated via the chart below, as we expect sustained negative growth for the foreseeable future.

Conclusion:

• Certain sectors and submarkets ie Oil and Gas and the City / Canary Wharf will be more significantly impacted by Covid19 and are therefore at greater risk of releasing space

• Oil, gas and natural resource sectors have been impacted by reduced manufacturing and logistics

• Retail, leisure, hospitality and travel sectors have been impacted by the lockdown and social distancing measures imposed on society and are likely to be further impacted by ongoing near term reduced consumer travel and spending

• As an example, 5 of the 11 West End releases are from this collective sector

Submarket impact

  • Due to the Sector issue above, certain Submarkets are going to experience greater impact from release where exposed sectors are clustered

· Of the 11 tenant releases in the West End, 4 of them are in Victoria, which has significant clustering of retail and oil sec

SHBRE predictions for the Central London Market post Covid-19

By speaking to both employees and employers, it is evident that many are pressing for the adoption of a policy of agile working, enabling them to work from home on specified days of the week or rotating the workforce on a one-week in and one-week off type of system. This is likely to be of particular interest to long distance commuters, resulting in reduced travel costs and a better quality of life. The effect of this revised way of working is that employers are also likely to benefit from a healthier, happier and more productive workforce.

However, while we may witness, over the next few years, a contraction in the quantum of office space leased by office occupiers, it is highly unlikely that the need for office space will disappear altogether as it remains to be a focal point for staff to meet, collaborate and socialise. It’s clear, there’s a number of drawbacks from adopting a full time working from home approach as this leads to some feeling socially isolated as well as some businesses struggling with the loss of culture and brand for example. This is something SHBRE have identified as a serious issue around operating a full time working from home approach.

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