London office space may require upgrades surpassing $43 billion to prevent millions of square meters of office space from becoming obsolete, just as businesses step up their return to office drives.
Major cities across Europe, London chief among them, are staring down an office space crunch that is pushing prices up and leaving businesses scrambling to accommodate their returning workers, according to research by real estate services company Jones Lang LaSalle (JLL).
The group has identified an alarming fall in vacancy rates, with London’s West End holding just a 1.7% vacancy rate for new space, highlighting just how little commercial real estate is available in London.
There are several reasons for an increase in new office space demand, and mounting costs to renovate the existing stockpile, according to JLL.
Firstly, not enough new space is being built, with new builds since 2020 and ongoing construction accounting for less than 15% of the market.
Much of the stock that remains is rapidly aging. More than 9 million square meters of London office space is in need of “significant” upgrades in order to meet modern standards, the group says.
Firms look to renew office space
Part of the demand for better office space has also come from what Phil Ryan, Director of Global Research for City Futures at JLL, calls a “reversion from overcorrection.”
“Let's say you're a major financial or professional services firm. And you said, ‘We think in 2022 this is what the future of our workplace plan is going to look like,’ and you said, ‘I'm going to sign a lease and right size by 35%.’ You get a really nice quality new location. Your employees really like it.
“And you're also seeing the market around you move towards a more aggressive return to Office schedule. Now we've run into a problem. We can't actually accommodate in the space that we have, so we need some spillover.”
Ryan says businesses are addressing spillover needs by sub-leasing additional office space or investing in flexible workspaces.
“It's something that's probably going to be driving a bit of the demand on bringing existing product back up, because those types of leases are a bit unusual. Either they're a bit more temporary until maybe a better space down the line can be found where you can bring them all under one roof.”
Many companies are motivated to bring back employees to improve collaboration or amp up productivity.
Another motivation, though, is likely to get the most benefit out of their hefty real estate outlays. One in three respondents to a survey by Resume.org last December said lease agreements were the driving factor behind their push to get employees back to the office.
For other companies, the biggest challenge is increasingly not having enough space. During the initial years of the pandemic, several firms gave up expensive leases rather than extend them amid uncertainties about a return to normal, or what a “new normal” would like.
JLL has in the past pointed out that firms wouldn’t be able to match their ambitious RTO mandates with their current level of floorspace for their employees, effectively limiting them to a hybrid, hotdesking model.
As demand ticks back up, there is also an acceptance that more variance in office quality needs to come to the market, after companies snapped up the high-quality spaces.
“We haven't had the supply of that very good, but not the absolute best space coming through in overall supply,” Cameron Ramsey, a senior director in capital markets research at JLL, told Fortune.
What’s encouraging though, according to Ramsey, is that more fixed hybrid working structures could spell an end to the uncertainty that has whirred on for five years since the onset of the COVID-19 pandemic.
“People are generally fairly comfortable with their hybrid work strategy,” Ramsey added. “And that's enabling people to say, right, we know what we need, let's get out into the market and find that space.”
