The London office market continues to weaken, but not in the way analysts expected
120 Fenchurch Street, also known as the Walkie-Talkie, has become an iconic London building. The structure, completed in 2014, leans over the adjacent street on its Thames-facing side like an invigilator peering over a child’s shoulder during an exam.
But while the shape of the building might be strange, recent developments in the London property market are even weirder. According to recent estimates by Investors’ Chronicle, the City of London currently has more than 45 Walkie Talkie’s worth of unused office space, the worst oversupply in its history. More than 31 million square feet are now standing empty in the nation’s capital, higher than at any point since records began in 2005.
Strangely, though, the laws of supply and demand aren’t working in the usual way. You would expect prices to fall in a supply glut, but that hasn’t happened. Figures suggest that rental prices are roughly the same as before the pandemic.
Of course, in economics, there’s no such thing as a free lunch. You cannot escape economic gravity, no matter how hard you try, so many observers are feeling puzzled. Prices should have fallen, but they didn’t.
The answer to this conundrum is that office space providers are having to offer better services in exchange for charging the same price. In other words, tenants are getting more for their money in 2022 than they did in 2019.
In the past, office space providers could “let and forget.” But now tenants no longer find that acceptable. Their expectations are greater, and if they don’t get what they want, they’ll ask for deep discounts.
Perhaps the biggest change we’ve seen is the so-called “rent-free” periods. Here, companies can move into offices and pay nothing for the first few months, something that was seldom seen in the past. The goal is to simply get them to sign the dotted line and enter a contract.
In some cases, the number of rent-free months available is considerable. Landlords are offering up to nine months in some cases.
This means that the headline rate of office rental prices is pretty much the same as it was before the pandemic. But the amount of money office owners are getting is actually a lot lower. Plus, they are having to work for it.
New services, such as Evo Supplies, have been at the forefront of these changes. Companies now expect landlords to get actively involved in helping them move from one premises to another. Office owners are now taking on the role of management agencies, offering turnkey services designed to attract new clients.
London office rental prices are also being affected by the two-tier nature of the market. Grade A office space rented by international firms who want a presence in London is still in relatively high demand, particularly in the West End. But second-tier office space is no longer as popular as it was. And that’s leading to some bargain prices outside of Canary Wharf and the square mile. Quality offices are attracting decent rents, but other landlords are having to cut their prices to secure contracts.