The Future Of The Office Is No Longer A Debate. Now What?
September. The summer holidays are over, and with their passing comes a renewed focus on whether workers will go back to the office in greater numbers.
The answer, in the form of data from multiple sources, is a resounding no.
Despite the focus on back-to-the-office mandates from large corporations like Goldman Sachs and Amazon, the fourth post-summer return since the onset of the pandemic shows a clear picture of how people work and use offices now.
The average occupancy of London offices in the first week of September was 33%, according to data from Remit Consulting. That figure was 32% in 2022, and the average for the first half of this year, before the summer break, was 31%.
The new normal is here, those active in the London office sector say, adding that things are never going back to the way they were and the real estate world needs to learn how to function in a different reality.
Remit aggregates office occupancy data submitted by property managers from buildings across London and nine other UK cities to create an average occupancy level for offices across the course of a week. And how this occupancy is spread out across the week is also starting to crystallise.
“We have some sense of direction now,” The Office Group CEO Enrico Sanna said. “You had the die-hards, who were coming back in to the office four to five days a week as soon as possible. And people who were only coming in once a month are now coming in maybe once a week. But then you have a long tail of people who are coming in Tuesday, Wednesday and Thursday.”
Brookfield Properties, one of London’s largest office landlords, found in a recent survey of workers in its buildings that 65% to 70% were coming to the office three days a week, typically Tuesday, Wednesday and Thursday.
“I don’t think we’re quite at the new norm yet, but we’re getting there,” Brookfield Properties Head of UK Leasing Martin Wallace said.
Since September last year, Remit’s data shows average office occupancy in London moving within a narrow range in periods outside school holidays, peaking at 36% and falling as low as 24%. The British Council for Offices estimated that even pre-pandemic, maximum office occupancy was between 60% and 80%. Remit has adjusted its data to account for this fact, finding that offices are about half as full on an average day as they were before the pandemic.
Numbers may tick up slightly as companies push for a return from workers, but things are unlikely to change dramatically.
"The current figures are very similar to those seen 12 months ago, and while the data has been stable for many months, given the increasing number of businesses mandating a return to the office, we may see an increase in office occupancy rates over the next few weeks,” Remit corporate real estate consultant Lorna Landells said.
Other data relating to working habits shows similar lower levels of utilisation compared to before the pandemic, with usage plateauing over the last year. London tube journeys on 7 September were 83% of the level of the equivalent day in 2019. In the past year, tube usage has ranged between 71% and 84% of pre-pandemic levels.
Data compiled by economists, including Stanford University professor Nick Bloom, showed that between April 2022 and April 2023, the average number of days worked from home by a sample of UK workers fell from 2.2 days a week to 1.5 days a week. That number is likely to stay static, especially as it aligns with the 1.7 days a week working from home that UK employers are willing to offer staff, although workers reported they would prefer 2.3 days a week at home, per the data.
If this is what the world of work is going to look like from here on in, what does that mean for London office demand? Data on takeup suggests that demand is likely to be down overall and that the nature of that demand has changed dramatically.
The first half of 2023 saw 4.4M SF of offices leased in central London, data from BNP Paribas Real Estate showed, 27% down on the same period last year and 16% below the five-year H1 average. Vacancy in London is 9.2%, higher than the 10-year average of 8%.
Whether takeup remains subdued permanently is open to debate. Brookfield’s Wallace said that since the pandemic began, 65%-75% of the leasing deals Brookfield has completed in London have seen tenants expanding rather than contracting. He attributed the disparity with the wider average to the fact that, while the pandemic is no longer front-page news, companies are still coming to terms with its impact.
“Businesses are still in the aftermath of the pandemic and are either trying to work out what these changes mean or are conserving capital,” he said. “There is less churn, and companies are putting more time and research into making long-term commitments.”
But the nature of office demand, what tenants want, is already very clear and becoming apparent in the data as well. And some investors are placing big bets based on that demand.
“On average, there will be a drop in demand, but as a developer or owner of office space, I don’t care so much about the average or if a company wants to shrink from a 1M SF building to a 500K SF building,” Castleforge founding partner Michael Kovacs said. “I just need to make sure I own that 500K SF building they want to move to.”
Kovacs pointed to HSBC's just-completed deal to move out of its 1M SF tower in Canary Wharf to a new 500K SF building owned by Orion Capital Managers in the City, paying a reported average rent of around £90 a SF. Occupiers have paid rents that high in the City before, but never on such large chunks of space. The top rents being paid by tenants are up across the West End and the City, BNP data showed.
Capital values are a function of interest rates and global capital flows, Kovacs said — but rents are a reflection of which buildings an occupier really values.
“I don’t know what more proof you need that tenants care about being in the best buildings in the best locations than the fact that an occupier will take half the space but pay double the price per square foot,” he said.
Castleforge earlier this year paid £280M for the former London HQ of Deutsche Bank and is investing double that sum again to refurbish the building and create a new £1B HQ building it thinks will appeal to major corporations.
For the owner of the older, empty office buildings, of course, this shift “destroys value,” Kovacs said.
“The gap between the best and the rest is widening,” GPE’s Baden-Powell said.
City of London office yields have increased by about 125 basis points in the past year, data from CBRE Investment Management showed, equating to a fall in values of about 25%, while the West End has remained more resilient due to tighter supply.
Offices are starting to trade at values significantly below not just the price paid by sellers a few years ago but also below recent asking prices.
Lion Plaza Propco completed a deal to buy the 265K SF Lion Plaza office on Old Broad Street for £209M in July.
The building was originally put up for sale at the end of last year for £263M, a 4.75% yield, but a sale at £209M represents a 6% yield and a 20% discount to the original sale price.
Vestas Investment Management and Savills Investment Management bought 125 Shaftesbury Avenue in the West End for £267M in 2018, when the building was fully let to WeWork. With the flex operator having terminated its lease, it was put up for sale for £180M earlier this year. It sold this week to Mitsubishi Estate and Edge Development for £150M.
Real estate has been through this before, Kovacs said. He quoted from a New York Times article about Manhattan law firms driven out of older office stock that didn’t meet technological requirements or have the right floor-to-ceiling heights, drawn away by newer buildings and compelling tenant incentives. The piece was written in 1988.
Some things never change, but some things do.
“A lot of the office stock hasn’t needed to change since that article was written,” Kovacs said. “People are finally waking up.”