COMMENT London’s office market is facing a crossroads moment. Availability of space is at some of the highest levels seen for 15 years, with an estimated 31m sq ft of office space vacant – the equivalent of more than 480 football pitches, with most of the space remaining in the secondary office market.
But despite record space available, the market is gripped by a ‘flight to quality’. Cushman & Wakefield’s analysis shows grade-A office availability dropping to its lowest quarterly proportion of total availability since 2010, at 42%. A trend it expects to continue, with the amount of space on the market diminishing into the second half of the year.
As head of Shoosmiths’ London office, and someone employed in the city, connections can be drawn between the move towards higher-quality space and changes to how we work.
Evolving needs
The acceleration of hybrid working as a result of the pandemic has brought major benefits – providing people with a level of flexibility not seen before. A consequence of this, however, is a lower average office occupancy – driving many businesses, including Shoosmiths, to re-evaluate the effectiveness of their spaces.
We absolutely see a future in the office. Recent years have shown the value of getting people together regularly for development, but also for team building and camaraderie. As a result, working spaces are now increasingly needed for wider uses, including wellbeing.
This creates a challenge for businesses whose spaces are not designed for these changes, posing them with the dilemma of either moving, refurbishing, or not acting and accepting the dangers of it.
Part of the flight to quality in the London market can be attributed to this choice, as businesses pursue space that meets the evolving needs of their employees. Combine this with the growing importance tenants are also placing on taking more energy-efficient space, and it’s clear to see why the boom for grade-A offices is putting pressure on other parts of the London office market, where demand and rents are struggling.
The gap is no more apparent than in Savills’ research, which shows prime grade-A office rents in the City of London on track to reach record highs in 2022, with its report attributing the growth to the difference between prime office space and “everything else” on the market. So, with the availability of prime office space squeezed, what more can be done to meet demand and utilise the vast amount of space vacant across London?
Balanced approach
It is important that construction across the capital continues at pace. However, this doesn’t have to just be about creating new office schemes.
Restoring, repurposing and upgrading older buildings needs to be an integral part of the city’s development landscape. This not only provides an opportunity to create better quality offices, which may attract tenants, but upgrading existing sites can negate the environmental impact of demolition and redevelopment.
Though consideration must be given to sustainability throughout the lifespan of a building, this approach is a compelling option for developers, investors and tenants, when compared with the embodied carbon emitted during the development process.
Embodied carbon is particularly significant in the construction phase, with the production of steel and cement contributing up to 18 per cent of global CO2 emissions annually. RICS also estimates that 35% of the typical lifecycle carbon for an office development is emitted before the building is opened. While new buildings can be more energy efficient, this has to be weighed up against the environmental impact of demolition and new development.
There are high-profile examples from the past 12 months of the government stepping in on plans to demolish and regenerate landmark buildings in London. This has put the environmental impact of full regenerations under the microscope, while reaffirming the importance of maintaining London’s heritage and architecture. Again, restoring and upgrading existing buildings offers a key way to achieving this.
These are all factors businesses must consider as part of their office real estate strategy. With the rise of the environmental, social, and governance agenda, it may be that investing in improving an existing building is a more cost-effective option for firms looking to create better workspaces for employees while delivering on their wider corporate objectives.
There will always be some good reasons for demolishing older buildings. They may be suffering from structural problems that cannot be overcome, or require high levels of investment that would make it an unviable option for any developer, landlord or tenant.
As the race for grade-A office space continues, however, the benefits of adapting and improving existing stock must not be ignored.
The high volume of secondary space available in the capital puts London in a prime position to unleash the model’s full potential, allowing the real estate industry to bring forward the high-quality office space businesses need while addressing key ESG factors in the process.
Joseph Mazzucca is a real estate partner and head of London office at Shoomiths
