Who Gets The House: Are the City and West End Headed for Divorce?

The rise and fall of all markets, products, services, and commodities has always been allied to the fluctuations of national and international economies. What won’t come as a shock, is that the London office market experiences the same ups and downs.

In times past, the commercial property markets in the West End and the City have, broadly speaking, moved in tandem with each other, both doing well when domestic and global economies are booming, and both suffering in downturns. But now, there appears to be the beginnings of a divide between the two, each one reacting unusually differently to the other across a number of KPIs.

Is this emerging trend worrying? Perhaps no more so than usual in these strange times we find ourselves in, but let’s take a look at what’s happening.

Vacancies

Since the start of the Covid-19 pandemic in Q1 2020, vacant space in the City has risen to its highest level in two decades - to approximately 12%. To underline the seriousness of that number, it’s much higher than the peak vacancy rate the City experienced during the 2008 global financial crisis, the most debilitating economic catastrophe since the Great Depression.

By way of comparison, vacancies in the West End seem to have levelled off at around 7%.

Another compounding factor was the timing of the pandemic. Before coronavirus hit, new building projects had reached unprecedented highs, resulting in approximately 3.2 million square feet of new space - including the 62-story, 278-metre tall, 1.4 million square foot 22 Bishopsgate project - being added to the market in 2020 despite low demand and, interestingly, accounting for almost half the new space. Since the start of the pandemic, the gap between vacancy rates in the City and the West End has widened to its highest level for a dozen years and it offers no sign of narrowing.

Rents

Back in October 2023, we wrote about the world’s most expensive office locations - known as trophy space - and another sign the two areas are coming apart is where rents are concerned.

Average market rents in the West End are up by about 12%, however over the last 3-4 years, they’ve stagnated in the City, partly due, as we alluded to earlier, by the amount of empty space. 

Letting Time

Prior to when the coronavirus hit, leasing voids - the period of time a property is unoccupied and not generating rental income - in the City and West End were generally similar, with gaps between the two measured usually in days or weeks rather than months. However while it’s true that space in both markets is taking longer to let than pre-2020, offices in the City are taking around three months longer to let than their West End counterparts. The gap does seem to be compressing slightly, but in the next 12-18 months, landlords in the West End will see shorter leasing voids.

Take-Up

One area where the City is ahead of the West End is in annual take-up, and the biggest factor is size.

Take-up in the West End is as low as it’s been since the pandemic, and while corporate occupational strategies have shifted over the last few years - former Barclays Group CEO famously said ‘The notion of putting 7,000 people in a building may be a thing of the past’ - average occupier size is another KPI.

Between 2000 and 2020, four in ten of all 100,000-square foot deals have occurred in the City, and in the last five years or so, that number has increased to 55%. In the West End on the other hand, the average deal size has decreased by a fifth. 

Why Is This Happening?

These factors are due in part to the 2022 mini-budget, continued market and geopolitical uncertainty, high interest rates, and the problem of suitable relocation options. Indeed it is believed that for tenants looking for 100,000-square feet or more, around 90% of available space is outside the West End.

Of course it’s impossible to know with any degree of certainty, and while vacancies in both the City and the West End will remain on a concerning upward trajectory over the next four quarters, the demand for large spaces may, in time, reconcile the marriage.