Commercial real estate can be the growth lever the government is looking for, but as the industry gathers in London today, the global investment community has its eyes on the current shortfall of London offices, says Philip Hobley
As Prime Minister Sir Keir Starmer and Chancellor Rachel Reeves cast around for the `growth lever’ there is one sector that can deliver billions of pounds of inward investment, enhance productivity for millions of people and create a feelgood factor for the whole of the UK: commercial real estate.
And in particular, the best London office, hotel, residential and student developments.
New developments across London – Broadgate, 8 and 22 Bishopsgate, 40 Leadenhall, Paddington Square, Soho Place, Battersea Power Station, and Kings Cross have brought a new international standing to our capital, helping to continue its dominance over the likes of Paris, Frankfurt and Dublin.
These developments have been funded or acquired by investors from France, Canada, Singapore, Hong Kong, Malaysia and Australia, stimulating construction, re-shaping the capital and creating wonderful places to live, learn and work.
Before I go on, let’s pause and think back: It is incredible to think that five years ago this month, the idea of even going to the office, socialising or travelling was on the verge of being banned.
February 2020 ended with 23 confirmed cases of Covid 19 in the United Kingdom, but a warning of the pandemic to come was that around 440,000 calls were made to the non-emergency 111 line in the last week of the month.
On 12 March the FTSE100 plunged by over 10 per cent – the biggest one day fall since Black Monday in 1987 and on 16 March Prime Minister Boris Johnson implored us to work from home if possible.
Thankfully – with the help of incredible vaccine breakthroughs – the pandemic has now passed and city centres and prime offices are now flourishing again as part of an upswing with more property occupiers having greater commitment to offices and in turn an upswing in investment interest actively looking to invest in London.
The year ahead
At Knight Frank’s annual London Breakfast today, more than 400 real estate experts will gather at Portman Square’s Nobu Hotel to hear our forecast for the year ahead, five years after the existential threat to the office that was Covid 19.
There are now companies searching for 11m square feet of offices, with at least half a million sq ft of new requirements being added every quarter during 2024, as businesses move to drive strategic transformation and the obsolescence of existing stock starts to bite.
Even those companies maintaining a hybrid model are finding that they need at least the same amount of office space to deal with peaks of staff across the working week, and provide a reimagined range of amenity to support talent.
The vacancy rate for prime buildings in the core markets is 1.5 per cent in the City of London and 0.3 per cent in the West End, meaning that companies who need new offices are starting their search up to four years before their current leases expire.
By 2028 Knight Frank is forecasting a shortfall in London offices of 10.3m square feet of new space, which many companies see as crucial for staff retention and as a strategic part of corporate change.
That’s the equivalent of 15 Walkie Talkies needed in London alone.
By 2028 Knight Frank is forecasting a shortfall in London offices of 10.3m square feet of new space, which many companies see as crucial for staff retention and as a strategic part of corporate change
That office space will need to enhance productivity, collaboration and wellbeing. But functionality is becoming more important than `flash’ for many companies too. Why? Because the much-heralded return to office is being underpinned by a new driver. High amenity, events and experience supported a return to office (RTO) that was fuelled by FOMO. Now, RTO is being driven by FOBO – the fear of becoming obsolete. Hence a focus on functional amenity that drives productivity.
The shortfall of such offices hasn’t gone unnoticed by the global investment community.
We have identified £5bn of institutional investment requirements looking to invest in core London office properties in 2025.
Many of these are new requirements driven by these changing market dynamics, and the demand is sharply up from the £1bn of core offices that were bought and sold in 2024.
As London moves towards becoming a Mega City – a population of 10m people vs 9.1m now – the best transport, housing, schools and hospitals will be needed to support a city that has been a global leader during an age of volatility.
The best buildings and the real estate industry that creates them have played a pivotal role in this transformation. Now, five years on from Covid, London can play a critical role in delivering the rapid growth that the country so needs.
Philip Hobley is head of London offices at Knight Frank