Savills : The City of London Office Market – Open for Business

Roll up, roll up, read all about it…."Office tenants taking more space despite work from home". Of course, this is not a headline you see, but it is a true reflection of the state of the office leasing market based on a new analysis of occupational transactions in the City of London since 2021.

There is seemingly an accepted truth that office demand has plummeted due to post Covid workplace patterns. However, even though workers are going into the office less often, it doesn't automatically mean that we're seeing reduced demand as businesses still need to work out how they can marry less space with hybrid working patterns when the office is back at full capacity for at least part of the week.

The answer to this conundrum is far from simple, perhaps impossible, especially as most London businesses already occupied space intensively in the pre-Covid era on an open plan basis, with full or partial hot-desking, which means there are few easy wins that allow for contraction without preventing workers / teams from coming to the office on certain days. This contrasts favourably to the US, in particular, which is coming from a base position of low density occupation and is therefore more vulnerable to tenants utilising post-Covid work patterns to rationalise space.

The overall correlation between headcount and office size is under huge pressure in the US due to hybrid working, but this is not the case in London. The biggest threat to the leasing performance here is simply the wider economy, but even in the face of "stagflation", slow corporate deal making and a loosening of the white collar labour market, London continues to benefit from structural demand driven by ESG considerations and a desire to provide higher quality office space to an ever more discerning workforce.

When news broke of HSBC's decision to agree terms on 550,000 sq ft in a hugely significant deal at Panorama, St Paul's, media coverage focused on the 1.1 million sq ft in 8 Canada Square which it was leaving behind, equivalent to a 50% reduction in office space. In reality, HSBC actually occupy around 700,000 sq ft, so the reduction is closer to 20%, but even so, where was the fanfare for the significant commitment to London which this move demonstrates in the face of challenging economic and political circumstances, as well as internal pressure to move more operations to Asia?

"Legacy banks" have been carrying too much real estate since the GFC. Covid has merely reinforced that fact. We should be trumpeting the fact that big deals are still happening and at new, record headline rent levels for a repositioned groundscraper. Ultimately, their move is a boost for the market as, once completed, it will both support annual take up and raise the alert amongst other large tenants that if they want to secure high quality space in prime Central London, they are quickly running out of options.

What about other, less high profile tenants though? Is HSBC reducing their space take by circa 20% typical across the market? We recently set ourselves the following exam question on net absorption - since the beginning of 2021, how much space have tenants taken compared to their previous occupational footprint when acquiring new space?

We all know about the flight to quality and the willingness of tenants to pay premium rents on that product, but we wanted to test whether businesses were seizing the opportunity presented by hybrid working to scale back their actual square footage? In order to answer this question, our research team analysed more than 200 transactions of over 10,000 sq ft in the City of London between January 2021 and May 2023. We excluded acquisitions by serviced office operators, educational institutions and those which were short term in nature (less than 3 years). We also ensured that the footprint being left behind took account of any subleases or, conversely, any space held in multiple locations. The simple aim was to compare what the occupiers physically occupied before and after their deal.

The results are very encouraging:

• The total space occupied by tenants has increased by 27%, equivalent to approximately 1.5 million sq ft of positive net absorption.
• 41% of tenants took new space which was 10% larger than their previous footprint. Another 36% of transactions involved tenants relocating to the same size, expanding within their existing building or setting up a 1st-time office.
• Only 23% of tenants took space which was more than 10% smaller than their previous footprint.
• Professional Services, led by US law firms, were the most dominant sector (35%) within those tenants who upsized, followed by Financial Services (32%). Technology (8%) lagged back following recent travails in that market.

Not bad for a market where hybrid working has supposedly killed off demand.

Even this past month, Greystar has doubled its space at The Gilbert, as have Eisler Capital at Lucent, Piccadilly. These are the stories which garner less attention, but run counter to the oft quoted narrative of an office market in long term retreat because of hybrid working. The reality is more complex and varied, but our research shows that there is much cause for optimism.