"Office tenants taking more space despite work from home" isn’t a headline you see, but it's a true reflection of the City of London office leasing market based on occupational transactions since 2021.

Even though workers are going into the office less often, it doesn’t automatically mean that we’re seeing reduced demand as businesses still need to marry less space with hybrid working patterns, when the office is at full capacity for at least part of the week.

The answer to this conundrum isn’t simple as most London businesses already occupied space intensively in the pre-Covid-19 era on an open plan basis, with full or partial hot-desking, which means there are few easy ways to contract without preventing workers / teams from coming to the office on certain days. This contrasts favourably to the US, in particular, which is coming from a base position of low density occupation and is therefore more vulnerable to tenants utilising post-Covid work patterns to rationalise space.

The biggest threat to London leasing performance is the wider economy, but even in the face of “stagflation”, slow corporate deal making and a loosening of the white collar labour market, London benefits from structural demand driven by ESG considerations and a desire to provide higher quality office space to a discerning workforce. 

When news broke of HSBC’s decision to agree terms on 550,000 sq ft at Panorama, St Paul’s,  coverage focused on the 1.1 million sq ft in 8 Canada Square it was leaving, equivalent to a 50 per cent reduction in office space. In reality, HSBC actually occupy around 700,000 sq ft, so the reduction is closer to 20 per cent, but even so, where was the fanfare for its significant commitment to London in the face of challenging economic and political circumstances, as well as internal pressure to move more operations to Asia?

“Legacy banks” have been carrying too much real estate since the GFC. Covid has merely reinforced that fact. Big deals are still happening and at new, record headline rent levels for a repositioned groundscraper. Ultimately, HSBC’s move is a boost: once completed it will both support annual take up and raise the alert amongst other large tenants that opportunities to secure high quality space in prime Central London are quickly running out.

What about other, less high profile tenants though? Is HSBC reducing their space by circa 20 per cent typical across the market? We recently considered the following question on net absorption: since the beginning of 2021, how much new space have tenants taken compared to their previous occupational footprint?

We all know about the flight to quality and tenants’ willingness to pay premium rents on that product, but are businesses seizing the opportunity presented by hybrid working to scale back their actual square footage? To answer, we analysed over 200 10,000 sq ft+ transactions in the City between January 2021 and May 2023, excluding acquisitions by serviced office operators, educational institutions and those which were short term (less than three years). We also ensured that the footprint left behind took account of any subleases or, conversely, any space held in multiple locations. The simple aim was to compare what the occupiers physically occupied before and after their deal.

We found:

• The total space occupied by tenants has increased 27 per cent, equivalent to approximately 1.5 million sq ft of positive net absorption.
• 41 per cent of tenants took new space which was 10 per cent larger than their previous footprint. Another 36 per cent of transactions involved tenants relocating to the same size, expanding within their existing building or setting up a first-time office.
• Only 23 per cent of tenants took space which was more than 10 per cent smaller than their previous footprint.
• Professional Services, led by US law firms, were the dominant sector (35 per cent) within those tenants who upsized, followed by Financial Services (32 per cent). Technology (8 per cent) lagged back following recent travails in that market.

Not bad for a market where hybrid working has supposedly killed off demand.

Even this past month, Greystar has doubled its space at The Gilbert, as have Eisler Capital at Lucent, Piccadilly, both transactions countering the narrative of a market in long term retreat. The reality is more complex and varied, but our research shows that there is much cause for optimism.

Further information

Contact Will Butler

Market in Minutes: City Office Market Watch