London’s office market will thrive if it remains flexible
William Beardmore-Gray, Head of Central London, discusses the current London office market.
5 minutes to read
In August 2008 I was advising Lehman Brothers on plans to offload some surplus office space at its Canary Wharf European headquarters – and something was very wrong.
The client, a global investment banking titan, seemed short of money.
I had suggested a £100,000-£120,000 marketing budget to help Lehman fill these offices – a drop in the ocean for a company with $639bn (£498bn) in assets, and a seemingly straightforward investment to help it generate some rent from an empty part of its building.
Little did I know that Lehman’s senior executives had bigger problems on their minds. My client within the property team had spoken to her boss on holiday in the Mediterranean and the firm order had come back: “do not spend the money”.
The rest is history. On Sept 15 2008 Lehman Brothers collapsed, brought down by its subprime lending and overall corporate excess, triggering the global financial crisis and subsequent eurozone.
You could smell the fear on the streets of the City of London – it was surreal. The lights went out across the capital and property deals, which had been long agreed for expansion by occupiers across London, were falling out of bed every day.
Fast forward to today, and with Britain’s departure from the European Union eight months away, it is a good time to examine how the London office market has changed, and if we are heading for another crash similar to 10 years ago.
As soon as Lehman collapsed, banks stopped lending to fund new office buildings without a tenant signed up, and they remain very cautious today.
In the third quarter of 2007, oceans of new office space was being built across London, often funded by UK and Irish banks that hit trouble in the wake of Lehman’s demise.
Almost 4m sq ft of offices started that quarter, with another 5.3m sq ft commenced in the rest of 2007, giving a total of 9.3m sq ft for the year.
Much of that office space remained empty for years to come, with City rents falling from a peak of £63.50 per square foot in the third quarter of 2007 to £42.50 in the third quarter of 2009.
In 2017, by contrast, 4.8m sq ft of office development was commenced in the whole year, and rents in the City have remained stable at £70 per square foot.
And it is Brexit that has prevented today’s property market from spiralling out of control. Just as property developers’ natural inclination to build was returning in 2016 they were stopped in their tracks by Britain’s decision to leave the European Union. What is also very different from 2008 is general sentiment. From July 2007 the mood darkened month after month – with Brexit the mood initially plunged in June 2016 but was improving again by the autumn with Apple and Wells Fargo both announcing plans for huge new London HQs.
Lehman and other investment banking giants were not only the masters of the universe in the financial world – they also called all the shots in the office market as well.
But now the likes of Facebook, which in July announced a 600,000 sq ft expansion at Kings Cross, Amazon, Google and Apple are also growing fast across London.
Tech companies have been the biggest players in London since 2011, and with no cross-border trading barriers they are unlikely to be hindered by Brexit. These companies, filled with millennials and the even younger generation Z – born in the Nineties up to the mid-2000s – have also changed the nature of offices themselves since exploding on to the London scene in the wake of the 2008 crash.
Lehman’s London office building was a factory for making money. Ten years on, and most new offices at Canary Wharf and the City have a strong focus on flexible working and staff well-being, as the war for talent in the capital trumps everything else
What also died with Lehman in the UK was the traditional 25-year office lease, which tied companies to one location for a generation
And this leads me to my main prediction for the next 10 years for London as a workplace. Property owners are going to have to invest far more in their buildings in an era of historic low unemployment to keep the capital’s workforce happy. Property is a flexible business service, not simply a fixed physical product.
This is evident in San Francisco at the epicentre of the tech world. Here, nothing is too much trouble for property developers because keeping their buildings full – even on short leases – gives them the income they need.
Flexibility has arrived in the market because what also died with Lehman in the UK was the traditional 25-year office lease, which tied companies to one location for a generation. The market became so difficult that the average central London lease now stands at seven and a half years.
That is helpful to the customer – but service and amenity will be the next requirement in keeping the customer satisfied. To appeal to companies and their staff, the workplace must be flexible, amenity rich, service heavy, conductive to collaboration and vibrant.
Lehman Brothers’s collapse was a disaster at the time, and the worst fears always seemed to come true. With Brexit we were promised 75,000 City job losses, and at the most 5,000 will result.
The systemic panic that did so much to scare landlords into slashing rents in 2008-2009 has simply not taken hold 10 years on.