In 2021, Meta committed to a 20-year term at One Triton Square, an eight-storey office block near Regent’s Park, London. At the time, it was seen as a positive sign for UK business as the tech giant signed off on a further central London lease (Meta already had 57,700 square metres of office space across two sites in King’s Cross).
But last week, with 18 years remaining on its lease and without a Meta employee having stepped into the office, the company cancelled its contract, paying a reported £149m for the early exit.
Explaining the decision, a spokesperson for the company said: “The past few years have brought new possibilities around the role of the office, and we are prioritising making focused, balanced investments to support our most strategic long-term priorities and lead the way in creating the workplace of the future.”
Meta is not alone in re-evaluating its office requirements. In further signs of change, HSBC confirmed that it will be departing its Canary Wharf offices earlier this summer, where the bank’s logo has adorned the top of the 45-floor tower at Canada Square for more than a decade.
It is now aiming to cut 40% of its global office footprint in an effort to reduce costs and respond to new remote working patterns. HSBC’s preferred new London home, Panorama St Paul’s, is roughly half the size of its current address and was previously occupied by BT.
Office vacancies to hit new heights
Although the moves of HSBC and Meta are two of the bigger office downsizes, they are symptoms of a wider trend. A survey of commercial real estate executives by Cresa and Knight Frank revealed that, among large companies of 50,000 employees or more, 50% were looking to decrease their office floor space.
The primary reason for this has been changes to the way we work. According to the most recent data from the Office for National Statistics, around 39% of the UK’s adult population report having worked from home at some point over the past seven days. This is particularly pronounced in central London, where almost half of all working hours are in employees’ homes.
“The impact of hybrid working means that a lot of firms need less space than they had before,” explains Mark Stansfield, senior director of UK analytics at commercial real estate research company CoStar. “This is coming at a time when we’re at near record levels of new construction as well, so vacancies have gone up fairly sharply over the last few years across the country, particularly in London.”
CoStar’s research shows that 102 million square feet of office space is vacant across the UK. “That’s up 60% since the pandemic started, and we’re projecting that figure will rise by a further 20% over the next year and a half,” Stansfield adds.
The result will likely mean that office vacancies will soon eclipse the previous peak seen in 2012 when, in the wake of the financial crash in 2008, demand for commercial real estate fell away.
Cost is also a factor that’s impacting demand and was the most frequently cited reason for office relocations in the same Cresa and Knight Frank survey. The moves of HSBC and Meta have come alongside staffing cuts and there is a clear drive from businesses to find efficiencies as inflation pushes up other business expenses.
Regional differences in office demand
Although vacancy rates for commercial real estate have increased across the board, some regions of the UK are proving more resilient than others.
London’s Docklands area, which includes Canary Wharf, has seen office vacancy rates nearly double from 8.27% pre-pandemic to 15.87%. In addition to HSBC’s planned departure, Barclays, Moody’s and Credit Suisse are contemplating exiting the area.
Vacancies in Glasgow offices have also soared, with the vacancy rate more than doubling for commercial real estate over 15,000 square feet. “We’re seeing different stories play out in different markets,” says Lewis Beck, head of workplace for EMEA at commercial real estate firm CBRE. “Glasgow, for example, has been a real outlier, where we were seeing average attendance across 2022 drop below 20%.”
In contrast, London’s West End, which includes the popular dining and nightlife district of Soho, has been one of the areas where office vacancies remain the lowest. Stansfield claims that the presence of numerous bars and shops in the area is one of the reasons why the West End is showing greater resilience, as companies look to provide more reasons for staff to come into the office.
But even the most desirable office locations have seen vacancy rates rise. Despite London’s West End still having a vacancy rate that’s 1.5 percentage points lower than the UK average, it is still far higher than it was at the end of 2019.
The flight to quality
Although many businesses are looking to slash their office requirements, certain spaces remain in high demand. “There has been a big bias towards the better quality space,” says Simon Brown, head of UK office research at CBRE. “This means we have this odd situation in the UK where there is quite a lot of vacancy in the office market in aggregate, but there’s still very competitive bidding for the best quality space, which is always in more scarce supply.”
The quality of office space now ranks more highly than cost in occupier decision-making, according to Brown, and a record number of London offices in the ‘super-prime’ sector were rented out at more than £100 per square foot by CBRE during the first quarter of the year. “Businesses are happy to pay what would have looked like massive rents pre-Covid to secure the best spaces,” he adds.
High among the list of priorities for occupiers are location, technology, modern fittings and environmental credentials. This is proving particularly important for companies as new minimum energy efficiency standards come into force by the end of the decade.
This flight to quality is reflected in data from CoStar, which shows that vacancies among its top-rated office spaces have been on the decline since 2014, whereas vacancies in less-desirable offices are trending upwards.
Kraft Heinz is one company that still sees value in holding a high-quality office space. Rodolfo Camacho, its international chief people officer, claims that the office remains “critical” for talent attraction and retention. “Our brands stand for quality so you need to be in a location that represents that,” he says. “We also want to attract world-class talent and we believe that being in a central location is important for this.”
The business took out a 12-year lease to take over 38,000 square feet of The Shard in 2016 and occupies two floors of the skyscraper, based near London Bridge and the foodie hotspot of Borough Market. “Being in a location that is bubbly and exciting helps to create a culture of creativity in the office,” Camacho adds. “It makes you feel more connected to the world outside.”
Although doom-mongers predict that the office market will continue to decline, employers still see value in occupying high-quality space in desirable locations. This means that, despite rising vacancy rates and the widespread adoption of hybrid working, the office will likely continue to play an important role in our future working habits.