London’s office market has plunged into a “rental recession,” with the share of empty space hitting its highest level in three decades, investment bank Jefferies.
The New York-based firm said vacancies in the City of London, the UK capital’s historic financial district, accounted for 10% of the area’s total office space, while in the West End in central London that number stood at 7%. Both shares are the highest for 30 years.
And in Canary Wharf, a newer financial district, vacant units now exceed 20%. London offices were last this empty in 1993, Michael Prew, a property analyst at Jefferies, when the UK economy was in recession and its real estate market had crashed.
Now, vast tranches of the capital’s once-bustling business districts are gathering dust because of the persistence of remote work more than three years after the pandemic. Jefferies estimates that utilization of the city’s offices has fallen 20% since the end of 2019 as remote and hybrid work has flourished.
According to the investment bank, office vacancies have now reached a “tipping point” beyond which rents typically start to fall, prompting it to downgrade the stock of four big-cap property developers Monday, including British Land and Derwent London
Retail was technology’s first casualty and we think offices are next,” analysts at Jefferies wrote. “Utilization has shrunk and landlords are losing pricing power as tenants offload surplus space.”
Canary Wharf, in the former docklands of east London, is facing particular pressure on rents. More bankers are reportedly leaving the area as UBS (UBS) begins relocating staff working for Credit Suisse to its main London office in the City. Credit Suisse, which was bought by UBS in a rescue takeover this year, was one of the original Canary Wharf tenants.
Regulators have been watching the commercial real estate market closely for any sign that spiraling vacancy rates and falling rents could become the source of the next financial crisis. Banks that have provided loans to developers could be hit hard by falling property values, investors and regulators have warned over the past few months.
