The extent of how hard "evolving" workspace use trends and soaring interest rates have hit the property market has been laid bare, as figures show investor spend on central London offices plummeted by more than £5 billion last year.
Provisional data from real estate consultancy JLL estimates purchases of City and West End offices totalled £6.9 billion in 2023.
That was 46% below £12.68 billion of transactions recorded in the prior 12 months, and also lower than £12.63 billion of volumes pre-pandemic in 2019.
Julian Sandbach, head of central London capital markets at JLL said: “2023 will be remembered as the year where inflation and the corresponding use of interest rates to bring this under control had a markedly negative impact on both volumes and values for central London offices."
The firm found a number of deals signed were by private investors, attracted by higher yields. But there was a broader decline in institutional activity across the capital, "demonstrating investor reaction to rising interest rates and evolving trends in office usage".
Working from home and hybrid working have seen headquarters use fall in numerous cases, hitting the industry.
A number of occupiers are reassessing how much space they need, although central London landlords have pointed to strong tenant demand for high quality developments with good environmental credentials. That is encouraging some buyers to spend on grade-A offices and projects with scope to create buildings that will appeal to employers that want to attract staff in.
Among deals inked recently was M&G Real Estate and Normura Real Estate announcing a joint venture last month to work on a £200 million office block called The Fitzrovia.
Peter Riley, head of capital solutions & UK commercial at M&G Real Estate said: “The scarcity of grade A office space in this prime location, coupled with the transformative impact of Crossrail, positions The Fitzrovia to appeal to best in class occupiers and investors."
He added: "Our intention is to selectively target further opportunities to invest in London alongside other leading global real estate investors, to improve the built environment and deliver world class real estate solutions of scale.”
London office occupancy improved in 2023
The West End led the way
The West End had the most success in London for back to office occupancy last year, with the area also performing ahead of the UK figure according to latest research.
Remit Consulting, which tracks figures provided by building managers, found the average monthly occupancy across the UK in 2023 was 30%.
The London figure averaged 30.6% each month, with the West End recording an average of 42%. The company estimates pre-Covid office occupancy levels in London would have averaged between 60-80%.
Landells at Remit Consulting said: "Average office occupancy levels in 2023 were the highest recorded since the lifting of lockdown restrictions and show a slow but positive upward trend, despite occasional setbacks due to factors like the train strikes and school holidays."
She added: "In London, the West End's strong performance indicates a strong preference from staff for in-person meetings and the social aspects of office environments in central locations and with companies and their employees finding a middle ground between remote and in-office work, a new, more adaptable approach to utilising office space seems to be emerging."
JLL's Sandbach said: "Whilst we are still witnessing pricing volatility in some areas, we are cautiously optimistic about 2024. Forward indicators indicate that financing costs will improve, and whilst we are unlikely to see the all in costs of borrowing at the historically low levels witnessed from 2009-2022, falling interest rates will allow a more accretive use of leverage to facilitate transactions."
He added: "Therefore, expect to see increased volumes in 2024 across a variety of structures including sales and acquisitions, joint venturing and recapitalisations."
