Cranes Galore: An Update on the London Office Market in May

By Jonathan Vanstone-Walker

News • Thoughts

30^th May 23

Today, there are more cranes in London than at any time in the last 10 years.

According to Deloitte, this is because investors are scared of the MEES regs and are refurbishing before it’s too late. There is a lot of repositioning going on. And unusually, more in the West End than in the City.

Looking forward, there will be a glut of supply later this year before constraining into ‘24 and ‘25.

Values are falling but the best Prop Co’s can’t deliver office space fast enough to meet demand…

They all suffered big write-downs in the Q1 valuations and there is talk of a further 10-15% in June.

At the same time, companies like Helical, Derwent, and GPE (who have great office stock) are printing leases like McDonalds sells fries. All this is despite a c.8% vacancy rate in London:

Derwent’s leasing activity in Q1 2023 totalled £17.1m
GPE reported a record £55.5m of new leases signed in 2022-23
Land Securities’ West End offices are ‘effectively full’ at 99.5% occupancy
Helical added £5.4m in rent at a 7% above ERV

They all want to buy more buildings to make the most of ‘unbelievable’ value.

But is anyone willing to sell at today’s prices?

For all the talk of buying, the investment market is still quiet.

Savills compared investment figures to the GFC to show ‘it’s not that bad’. Which is true for total investment…but the office investment numbers are close to historic lows:

The problem is that there aren’t enough motivated sellers in the best submarkets i.e., a passive investor, who used to ‘let and forget’, about to get hit by MEES regs, facing a refi. There are only so many of these people out there.

If you’re an indifferent owner with decent kit – why would you sell? The market provides no external motivation right now.

Meanwhile, in the occupier world…

Earlier in May I joined a team visiting one of the estates we manage to deliver quarterly tenant gifts.

It gave me a chance to speak with businesses and understand how they’re doing. These are ‘old school’ Shoreditch tenants like design agencies, ecommerce distribution, a coffee roaster, plus offices of course.

Some common themes:

Business is good
Planning to expand
Planning to invest
Getting people back into the office more often

Maybe it was just this site, but I didn’t get any bad vibes, and no one seemed worried about an impending recession, financial crisis or any other major problem.

Another client that I met also wants people back in the office 3x per week

They’re a non-profit in the education sector: usually these organisations are very pro-remote. However, their quota of office days is now going up to help collaboration. A lot of private companies have already worked this out, but it was encouraging – and a bit weird – to hear it from a different sector.

Perhaps another good sign for offices in the long term.