Given the prevalence of hybrid and remote working, several large multinational corporations are seeking to consolidate and downsize their London office space. In this newsletter, we highlight some notable examples and look at how the London office market is adapting.
What is happening in the London office sector?
Several high-profile corporates are downsizing or exiting their existing leases of flagship premises to move to premises with a smaller footprint.
British Land reported in its recent trading update that Meta, Facebook’s parent company, has paid £149 million to British Land to surrender its lease at the recently redeveloped 1 Triton Square in Regents Place, Fitzrovia. This is despite Meta having only entered into the lease a mere two years ago and not having yet moved into the building.
Elsewhere, market reports have indicated that Lloyds Banking Group is considering whether to leave its Gresham Street office for refurbished premises owned by Lloyds on Old Broad Street. Lloyds indicated last year that it was planning on cutting its office space by 30% over the next 3 years. Pentland, owned by the sports goods Rubin family, is reported to be decreasing its office footprint by 30,000 sq ft as a result of jobs moving overseas and flexible working patterns and is leaving its Finchley offices to move to new premises in Farringdon. This follows HSBC’s decision to relocate from its famous Canary Wharf premises to smaller offices in the City (see our ‘Commercial Property Market Update – Autumn 2023’ newsletter).
Is the London office market in a ‘rental recession’?
Analysts at financial services company Jefferies have claimed that London’s office market is in “rental recession” as empty workspaces have hit a 30-year high, with a 20% contraction in office usage in London due to post-pandemic hybrid working and tenants seeking to move to greener premises. Jefferies estimates that West End office vacancies are at 7%, rising to 10% in the City and 20% in Canary Wharf. Jefferies said the tipping point for rental recession is typically 8%.
What is the impact of the recent moves on landlords and developers?
Reuters recently reported that shares in Land Securities, British Land, Derwent London and Great Portland Estates have fallen between 1% to 3% as a result of market pressures and higher funding costs resulting from high interest rates, with investors increasingly losing confidence. Jefferies has downgraded several of the London focussed real estate companies as a result of the hybrid working trend, noting that “investment market liquidity is receding on rent uncertainty and squeezing developer profits”.
How are landlords responding to the challenge?
In response to the challenges in the commercial property market, landlords are striking a hopeful tone and are seeking to repurpose existing office space, with analysts suggesting that new tenants can be found willing to pay a higher rent.
British Land responded to Meta’s exit from 1 Triton Square stating that it would allow the property developer to “accelerate our plans to reposition Regents Place as London’s premier innovation and life sciences campus”. Market expert, Peel Hunt, supported the view that British Land will be able to obtain a higher rent than that paid by Meta at the development. Pentland is rumoured to be marketing its Finchley premises to potential office occupiers but is likely to redevelop the space into residential homes.
Countering the narrative, Land Securities has reported strong results with occupancy rates across its portfolio of 96.9% over the first five months of the current financial year and has recently rented £2.2 billion of mature office space.
Is the trend towards increased hybrid working likely to continue?
The trend towards increased hybrid working may have peaked, with employers in the financial, legal and tech sectors, including Meta, Amazon and Google, insisting that employees must be in the office at least 3 days a week. Concerns exist that employees’ productivity is lower working from home than in the office and there is a belief that the benefits of face-to-face interaction in the office lead to the sharing of ideas amongst employees and greater learning.
Centre for Cities, a market research firm, considers that post-pandemic predictions of the death of the office were misguided, noting that usage of exits of tube stations in office districts has shown a strong recovery in 2022 and 2023, with research showing that the average number of days spent by employees in the office is increasing.
How 3CS can help
Uncertainty in the market undoubtedly leads to opportunities for tenants to reduce rental overheads by reducing office footprint in existing leases or moving to cheaper premises. If you are in this position, our experienced team of property lawyers and consultants can help you analyse your legal options under your lease. We can assist landlords who are considering repurposing their portfolio for other uses, or seeking a higher rental yield by refurbishing or redeveloping office space, to consider their ability to obtain vacant possession of premises and development rights.
For further information or help with any legal commercial or residential property matter, please get in touch with your usual 3CS contact.
