Q3 2020 London Rental Guide Update: we have decided to keep our 1st March rent figures on hold once again. We don’t really want to alter them until a new market emerges when tenants return to work in offices again.
During the first lockdown the consensus from landlords was that they were suffering a temporary blip. The argument went that – before the lockdown – supply of quality office space was scarce. Accordingly, when people inevitably returned to work, previous demand would meet supply and the market would regain its equilibrium. A V-shaped recovery!
The argument seemed compelling (to some), but even a closer look at the words adopted reveals a weakness in the logic. “Return to work” was assumed to equal returning to the office. However, in the strange new “real world” people and businesses were working efficiently from home. For many people, the words “work” and “office” no longer mean the same thing.
Return to work was assumed to equal returning to the office. However, for many people, the words “work” and “office” no longer mean the same thing.
Fall in demand for office space is now structural
With the passage of time we now find ourselves in a second, indeterminate lockdown and I’m starting to sense a structural downward shift in demand. Today most tenant bosses are saying their future office requirement will be smaller. Staff and bosses alike have found a new blend of working in London for a few days and at home for a couple more. This practice can be efficient and can also help forge a more aspirational lifestyle.
Most bosses are saying their future office requirement will be smaller. Staff and bosses alike have found a new blend of working in London and at home.
London office rent: a prediction
So, what will happen to London office rent? I predict that quoting rents will remain at existing levels, for the time being. In the longer term, second-hand tenant space (and lots of it) will come to market at much lower quoting rents. Notably, tenants disposing of space (unlike landlords) are not interested in the value of office buildings. They just want to shift the burden of surplus office costs.
By about Q2 2021, landlords’ hands will be forced by a combination of tenants’ second hand supply and a structural downward shift in demand for space. Then as day follows night, net effective market rent will fall.
By about Q2 2021, landlords’ hands will be forced. Then as day follows night, net effective market rent will fall.