Vacancy rate reaches highest level in 30 years, London is falling into office "recession" Group | UK | Office Building
An office "recession" is sweeping London. Jefferies Financial Group of the United States released a report on the 27th saying that the office vacancy rate in London, the British capital, has climbed to the highest level in 30 years. With the economic downturn coupled with the rise of remote working in the wake of the coronavirus pandemic, large swaths of London’s once bustling business districts are now gathering dust.
The central business district of London, the global financial capital, has not been spared from the office “recession”.
According to a report by Jefferies Financial Group, the vacancy rate of office buildings in London's old CBD "City of London" has reached as high as 10%, and the vacancy rate of office buildings in the "West End" in central London has also reached 7%, both of which have climbed to the highest level in 30 years. In the new CBD "Canary Wharf", the office vacancy rate has also soared to 20%.
Jefferies reports that London’s office vacancy rate has reached a “tipping point” beyond which rents will begin to fall. Office owners are losing pricing power as office usage declines and some tenants choose not to renew their leases.
This has prompted Jefferies to downgrade the shares of four major property developers including British Land and London Derwent.
The report pointed out that as the global technology industry faces a cold winter, office buildings may be the next "victim."
Some original "big clients" are taking the lead in abandoning office buildings in London's financial district, and are willing to pay high liquidated damages for this.
Yuan Corporation, the parent company of the American social media platform Facebook, is taking the lead in cutting office space in London while laying off large-scale employees.
According to British Land Corporation, "Yuan" Company has terminated its lease on an office building with an area of approximately 310,000 square feet near London's Regent's Park. To this end, "Yuan" did not hesitate to pay a "breakup fee" of about 149 million pounds, equivalent to about 7 years of rent. It is reported that the original lease expires in 18 years.
Coincidentally, social media giant "X" has also stopped renting an office on Aire Street in London. Three months ago, HSBC also announced plans to move its global headquarters in Canary Wharf to a much smaller building in central London.
Why is the London office market sluggish? This may be related to the economic downturn and the rise of remote working in the UK after the epidemic.
Analysts believe that even though the impact of the epidemic has gradually faded, the home and remote working model has become the daily working model of many companies, especially in industries such as technology.
At present, not only "Yuan" companies have officially shifted to a hybrid office model that combines remote working with on-site working, but other technology giants such as Amazon and Google also allow employees to work from home.
A recent study by Stanford University, the University of Chicago and the Autonomous Polytechnic University of Mexico also showed that British employees work from home on average 1.5 days per week, while the average in the United States is 1.4 days per week. The study also found that employees in the IT and technology industries typically work from home for about half of the week, while those in the retail, transportation and hospitality industries work from home less than one day a week.
Even London's main commuter railways have seen sharp declines in weekday ridership. According to data from London South Western Railway, South Eastern Railway and GoVia Thameslink, the number of passengers every month is now about 22 million fewer than four years ago.
Industry insiders are worried that the drop in demand for office buildings will cause their value to shrink, which may cause a further blow to the British economy.
Commercial property owners already face huge potential losses. Recent data from BNP Paribas showed that the trend towards remote working has caused London office values to drop by a fifth over the past year.
Jefferies Group real estate analyst Michael Prue also pointed out that the last time London's office vacancy rate was so high was in 1993, when the British economy fell into recession and the real estate market collapsed.
Over the past few months, investors and regulators have also warned that growing exposure to commercial real estate has become a key risk for the banking sector. Regulators are watching the commercial real estate market closely for signs that rising vacancy rates and falling rents could be at the root of the next financial crisis.
