Why London offices are in such demand

HSBC was the poster child for downsizers. Last year the bank announced that it was abandoning its 45-floor tower in Canary Wharf in east London in favour of a new office next to St Paul’s Cathedral, in the City of London, about half the size of its current home.
For the office naysayers, the move, which will happen in 2027 when HSBC’s lease expires in the Wharf, was confirmation that the pandemic had irreversibly changed how — and where — people work.
But HSBC bosses are now concerned that they might have gone a bit too far. Although the company has not commented publicly, it is understood that the higher-ups are looking at whether there is another building near to its new base where it can rent some extra office space.
It is not the only one that believes it might, after all, need a bigger office than it thought necessary only a year or two ago. Linklaters, the Magic Circle law firm, originally agreed to take 14 floors at its new London headquarters but has since decided to move into the remaining three floors as well. BP and Virgin Media are among those to have also exercised options to take up more space in their new buildings. Clifford Chance, another law firm, had the option to give back a few floors at its next office, which is being built in the City of London, but it has decided against doing so.
“If you look back at most of the pre-lets that have taken place since Covid, I think there’s only one example where the occupier hasn’t exercised all of the option space,” an industry insider said. The only outlier is thought to be Reed Smith, the law firm, but even it has taken some of the extra space that it could have at its new building next to Spitalfields Market.
Surprisingly, the consensus in the industry is that most companies on the hunt for a new office actually want more space than they have at present. Land Securities, one of the country’s biggest office landlords, has agreed new leases with 31 tenants over the past 12 months: 25 of them have either increased their space or kept it the same.
That is partly because businesses are now giving more space per person; not in terms of desk size, but more break-out areas, canteen facilities and collaboration spaces. Landsec’s data shows that, on average, companies are giving each employee 145 sq ft of space, compared with 115 sq ft in 2019, a 25 per cent increase.
“In Covid, the press were very hot to jump on the fact that companies were downsizing and shedding space, but that was actually a fairly short-term phenomenon,” Elaine Rossall, the head of offices research at JLL, the global commercial real estate company, said. “Most are now actually taking more space than they occupied previously.”
JP Morgan, the Wall Street bank, is understood to be among them; having already maxed out its 33-storey Canary Wharf tower, it is said to be looking for more space in London.
Mike Wiseman, the head of office leasing at British Land, another major landlord, said there were “definitely some businesses that underestimated how much space they might need [during the pandemic].
“Everybody had this idea to run their real estate more efficiently; but then the busy days — Tuesday, Wednesday and Thursday pretty much in every office — if everyone comes in for those days, then you need the same amount of space,” he said.
Tom Curry, the head of City tenant representation at JLL, has sympathy for companies that moved during the pandemic. “I’m not sure businesses necessarily made mistakes in Covid; there was a business reality at that point in time where people were looking to save costs,” he said. “There were some knee-jerk reactions, but having had a couple of years now [companies] are able to make decisions with data about their workplace utilisation.”
On the whole, offices are still getting busier. Landsec has calculated that the number of people clocking in and out of its buildings is 9 per cent higher than this time last year. Tuesdays, Wednesdays and Thursdays remain the busiest days of the week, followed by Monday and then Friday, which is comfortably the quietest. “[Occupancy] is still trending upwards, so we expect to see that grow further,” Mark Allan, chief executive of Landsec, said.
More companies are ordering their staff back in more frequently. Amazon, the US tech company, will make all of its staff head back into the office full-time from January. Other businesses are known to be looking at how that goes, before potentially going down the same route.
A recent survey by KPMG, the Big Four accounting firm, found that the majority of chief executives expect to have returned to pre-pandemic working patterns by 2027. The findings raised eyebrows among office-based employees, most of whom like working from home for at least part of the week, but leasing agents say it is the reality on the ground. “What’s really consistent with everyone we talk to now is that they want [their] people in more,” Wiseman said.
Rather than demanding their in-office attendance, businesses, especially the bigger ones, want to lure their troops back in more often with swankier buildings. This “flight to quality” began a few years ago and is showing no sign of slowing down. “To get people to justify the commute then you have to deliver a good-quality workplace,” Curry said.
At the expense of lesser offices, demand for the newest, greenest blocks has exploded. “The flight to quality is about amenity, aesthetic, flexibility, terraces, end-of-trip facilities, all those sorts of things,” Wiseman said. “Equally important is location. How close are you to major transport hubs and what’s going on around the building?”
The problem is, however, that there are not many of these best-in-class offices available, nor is much being built. Data from Knight Frank shows that vacancy rates for “prime” offices in most parts of London are close to their lowest on record. In the West End, less than 0.3 per cent of all prime office space is available to rent, while in the City that figure is 0.5 per cent.
“There is a shortage of the good-quality space that people want,” Curry said. “There is competition around many of those buildings and, certainly in the short to medium term, that isn’t going to change.”
The combination of increasing demand and dwindling supply has pushed rents at the top of the market to record highs. Evercore is paying £140 per sq ft in annual rent for its new home in Victoria, a record for that area of London, while Banco Master agreed to pay £122 per sq ft at 22 Bishopsgate, a record in the City of London.
Toby Courtauld, chief executive of Great Portland Estates, the landlord and developer, believes that companies are also paying more than ever for the best offices in the West End, with many fetching £150 per sq ft or more. Such is the weight of demand that the expectation is that rents for the top offices will keep climbing higher.
Courtauld pointed to one block that GPE is redeveloping in Mayfair, where he has received enough inquiries to lease it three times over. “We’ve not even finished demolishing it yet,” he said.