Introduction

London’s office market is currently facing a challenging situation, with a significant increase in vacancies according to financial services company Jeffries. This surge in vacancies has led to a 30-year high in empty office spaces in the capital’s business hub.

Reasons for the Rental Recession

Jeffries analysts have attributed this rental recession to various factors. The rise of remote and hybrid working arrangements, along with a growing focus on environmentally friendly office spaces, has resulted in a 20% decrease in London office usage. Additionally, the level of vacancies has surpassed the tipping point at which rents typically start to decline, except in the case of sustainable buildings.

However, some of the vacant spaces have been occupied by flexible, co-working, and serviced offices, accounting for approximately 9% of London’s total office space.

Impact on Commercial Real Estate Companies

Jeffries has downgraded the ratings of British Land Company and Great Portland Estates, predicting further market contraction. Many prominent companies have already abandoned their London-based office spaces. For instance, Meta recently paid £149 million ($181 million) to terminate its lease early, while HSBC announced plans to move from its 45-floor Canary Wharf tower to a smaller space in central London.

However, Morgan Stanley remains optimistic about the sector and has upgraded the stock of Great Portland Estates. They believe that U.K. real estate investment trusts present a compelling investment opportunity, as the sector tends to perform well towards the end of economic downturns. Additionally, moderating net asset value declines and potential Bank of England rate cuts further support their positive outlook.

Market Reaction

Following this news, shares of Great Portland Estates dropped nearly 4% during midday London time, while British Land Company experienced a 2% decline.