In March 2020, London suffered an unexpected and unprecedented shutdown as a result of the lockdown guidance issued by the Government. Almost overnight the City went from being a thriving global business centre with a workforce of more than 500,000 to a ghost town.
Now, five months later, as workers slowly return they are finding quiet streets and a subdued city ecosystem. In order for the City to ‘bounce back’ to its pre-pandemic vibrancy the public need to feel confident that they can safely go back to the office. This is critical to create the demand and buying power required to support the 24,000 jobs in the City’s retail, leisure and culture businesses and to kick-start those cultural and retail elements that London is famed for.
On 29 July 2020 the City Property Association held an online panel discussion, chaired by Lisa Webb of Gerald Eve, which focused on the resilience of the City beyond Covid-19. The key takeaways from this discussion are summarised below:
Is the current market outlook indicative of the City’s resilience?
Yes. Despite the inertia in the lettings market across central London during the last quarter (Q2 2020 being the lowest quarter since Q1 2009), Elaine Rossall of JLL presented a broadly encouraging market update:
The market has been driven mainly by professional services and pre-lets with four out of five of the largest transactions in Q2 being pre-lets (accounting for more than half of the take-up).
There remains a concentration of demand in city sub-markets, 66% are considering locations in the central City core and there is a continuation of the west-to-east migration across the City buoyed by lower costs of occupation and increased connectivity and F&B offerings.
Prime office yields are below 3% in many cities around the world and are expected to remain flat. In London prime office yields are at 4% suggesting a greater resilience.
The UK remains the world’s most transparent market with London being placed at the top of the cities listed in the Global Real Estate Transparency Index 2020. This reflection of strong regulatory framework and governance will remain attractive to inward investment.
What is the impact of the rise in vacancy rates?
In Q1 and Q2 a number of transactions were either placed on hold or requirements downsized resulting in space under offer in the City falling to 1.3m sq ft.
In previous market downturns vacancy rates have risen sharply, however the 2020 rate has been mitigated by the level of new supply (there is only 4.1m sq ft currently under construction compared to 8m sq ft in 1989 and 7m sq ft in 2008). Although vacancy rates have risen in the last 3 months to just under 5% that figure is still under the 10 year average of 5.5%.
How has construction been affected?
This good news story for vacancy rates translates into a weaker outlook for development where delays to construction have depressed the pipeline and have pushed completion dates back by between 3-6 months. There were no new starts during Q2 as a result to the pause to construction and it is estimated that delivery in 2020 will be reduced by c.1million sq ft. However, it is expected that this reduction in supply should help to support rents in the short term.
There is increased space coming back to market, what impact will this have?
Although there is an increase in tenant-led space coming back to market this is pre-Covid related and occupiers do not appear to be placing space on the market as a result of the pandemic. Half of the available space is on leases of fewer than 5 years so does not compare with prime lease space on the market (rather than tenant-led space).
How is the investment market reacting?
There has been a similar level of inactivity in the investment market as in Q1. Overall investment is down from 2019, however, this is due to lack of quality supply rather than lack of demand (assets are being held rather than sold). Transactions are significantly below the usual levels of activity and investment volumes are down by three quarters on the Q1 total.
Of the transactions reaching completion in Q2, none exceeded £100m with the focus on acquisition of smaller assets by domestic buyers. However, interest from overseas buyers is once again on the rise with capital expected to come through later in 2020 as certainty returns to the market.
How important is the office worker to the City’s ecosystem?
Dan Burn (JLL, Central London Markets) explained that the purchasing power of the office occupier is required to support the amenities provided (bars, restaurants, theatres etc) and the transport system. In turn, workers employed in the retail, hospitality and transport sectors have their own purchasing power which will then support other businesses. He welcomed the Government’s choice to vest control in business leaders as to when they and their employees return to the office environment as a positive move citing the continuation of the furlough scheme as a factor working against encouraging workers to return to the office.
He also forecast the possible tax implications that might further damage the City’s ecosystem; the cost of the pandemic is not yet known but will presumably lead to higher taxes, however if there is less taxable income available to the Government (due to falling business revenues, redundancies etc.) other taxes will need to be put in place which may have the effect of frustrating people and businesses – and their spending power – further.
How are workers being encouraged to return to the City?
The panel agreed that public transport is one of main barriers to the return to the workplace and they understood that people did not want to be crammed onto transport. Alistair Moss, of the City of London Corporation, described the acceleration of transport policies that had resulted from the shifting needs of the workforce. Improvements to road safety and air quality had been implemented to make the City a “better place to be,” there were more pedestrianised areas, areas where cyclists could travel more safely than before and legislative change to allow use of more pavement space by cafes and restaurants. It was acknowledged that beyond London, national infrastructure (particularly rail use) was an additional blocker to the workforce accessing London. The panel mooted ideas such as staggered office hours and booking systems to limit passenger capacity as methods to increase passenger confidence and ease travel concerns but agreed that there was no single solution.
Mike Taylor, of Goldman Sachs, described a three pronged approach adopted by the bank (with regard to government advice) to encourage employees to return to the office. This approach involved monitoring and checking the readiness of the community, the building and the employees themselves. He explained that there had been a positive drive by younger employees (the majority of the workforce being in their early thirties) to return to the office since they enjoy the vibrancy of the city and the workplace. He also commented that, particularly in the case of client facing businesses, there is no substitute for human interaction whether in the context of external client communication or internal training and mentoring. A business’ risk management function is also better served through the proximity of in-person team-working. Reference was also made to the broader corporate social responsibility that businesses have to get workers – and the City – back on their feet.
How can planning shape the City’s resilience?
The panel agreed that there was still strong appetite for development in the square mile and acknowledged that a number of major schemes had progressed through committee during lockdown (e.g. the new Museum of London and the Millennium Bridge House redevelopment) with further significant schemes at pre-app stage and currently within the application system. Emerging trends in planning have also been accelerated in reaction to the pandemic resulting in more flexible building design to encourage collaboration, wellbeing-focussed design and increased use of technology within buildings.
On the topic of housing, Alistair Moss acknowledged that there was still a housing crisis and an affordability issue within London particularly for the younger workforce. He supported the need for a clear housing policy but did not think that the answer to future-proofing the City was to convert currently under-used office space to residential. Instead, there is a need for adaptable space in the city which generally residential use does not allow for.
What are the longer term trends for the future of the City?
Echoing an earlier point presented in Elaine Rossall’s market overview, Dan Burn anticipated that overseas investment into the City would increase based on the rising levels of international interest pre-Covid. In the immediate future there will be a slow recovery from the international market given the inability for physical inspections of property to occur as a result of travel restrictions and other lockdown measures. Despite this, London remains attractive due to the liquidity of the market, the fact that UK leases are still relatively long compare to other global cities and the strong occupational market over the last few years.
Mike Taylor explained that concerns around transportation were not going to go away and explained that London is behind cities such as Paris and Frankfurt in terms of infrastructure offering and investment will need to be made in that area to ensure that London continues to be a competitive place to do business. The focus on public realm improvements and the right urban mix of retail and leisure is a long term strategy not just as a response to Covid-19 with flexibility being a long term trend.
Alistair Moss referred to a recent survey of 500 global investors (carried out by the City of London Corporation) the results of which show that 80% of respondents were considering investing in the City in the near future. This confirms investors’ confidence in London and its attractiveness as a city with a reputation as a hub of innovation, talent and transparency.