Foreword
London is a city that has remained a core destination for international occupiers, investors, and global talent. It has long been a safe haven for global investors buffeted by economic headwinds. A city consistently renewed and refuelled by cutting-edge innovation.
There can be no doubt that the London office market – just like its global peers – is undergoing significant structural change. The market practices that have traditionally served to accommodate London’s growth and make it a crucible for global best practice are under severe pressure. New solutions and fresh approaches are needed for London to retain its global pre-eminence as a destination for global occupiers and investors.
There are 3 key factors generating structural change in the market and altering both supply and demand side dynamics. First, our experience during - and the subsequent legacy of - the Covid-19 pandemic. Second, the rise of the ESG agenda and a growing awareness of the centrality of commercial real estate in positively contributing to the mitigation of the global climate crisis. Finally, volatile and fragile macro-economic growth.
The ongoing evolution and interplay of these 3 forces pose some key questions for the supply and demand dynamics of the London market over the next cycle. In our view, there are 6 essential elements to fully understanding the future trajectory, positioning and performance of the London market.
The relative global positioning of London
One of the challenges of having long been at the centre of the global economy is complacency. London’s ability to continually reinvent itself to sustain relevance has never failed. Over the next post-pandemic cycle, where are the risks and how can they be mitigated? Moreover, how is London performing against its global peers? What are the progressive elements of London’s evolution that set it apart from competitors and fuel the next phase of its growth?
The path to recovery
London’s rich economic history means that current challenges have to some extent, been seen in the past. What can we learn from the recovery path that London displayed following previous periods of crisis? Can we identify turning points in market sentiment and dynamics? What is the role of private capital?
The change in occupier requirements and behaviour
The pandemic has upended traditional thinking about work and the workplace. As the office becomes repurposed, occupier requirements are changing rather than evaporating. We are in an age where product trump’s location, where occupiers seek to maximise efficiency and draw more heavily upon amenities and flexibility provided by the landlord. But as occupier requirements and behaviours change, this directly exposes significant parts of the existing London office market that fail to meet revised customer expectations.
Understanding what drives office out-performance
Ultimately, what structural change generates is polarisation. Over the next cycle, London will be a more polarised market in terms of the quality of office product, the viability of future office developments, and the rental and investment performance of those offices. For landlords and investors being on the right side of this market divide is essential.
Future supply and the retrofitting or adaptive re-use of existing office space
These new customer demands challenge landlords, particularly given today’s fragile macro-economic backdrop in which borrowing remains costly. Developing new offices that appeal is capital intensive. With more than half of London’s existing office stock falling foul of MEES standards and effectively unusable from 2030, retrofitting and adaptive reuse is clearly a big part of the London market response. Where will the capital to drive this upgrading of London’s office stock come from, and how will it be rewarded?
The sectors and sub-sectors that will act as dynamos for new office demand
A flourishing London office market is ultimately dependent upon the attraction of new growth industries and companies that make the city their home. Whilst many established companies will need to reconsider their office requirements when their lease breaks, London’s long-term future is tied to its ability to attract new high-growth companies from innovative sectors.