EDITOR’S COMMENT I wonder how many office landlords have little effigies of Mike Prew in their desk drawers that every so often they desperately want to stick pins into? The Jefferies analyst, well known for his bearish (and often correct) view on certain real estate sectors, put out a pretty damning note on offices this week, downgrading British Land to “underperforming” and the largely undisputed darlings of grade A offices – Derwent London and GPE – to “hold”.
Prew thinks offices are going where retail went. Down.
“Retail was technology’s first casualty and we think offices are next,” he said. “Utilisation has shrunk and landlords are losing pricing power as tenants offload surplus space. London vacancies are at a 30-year high and above the tipping point at which rents fall, except for scarce, green-ium rented towers.”
BL boss Simon Carter will disagree, of course. While Meta may well have just handed back the keys to the 310,000 sq ft 1 Triton Square, NW1, two years after signing for the building it has never occupied, the REIT has some £149m in its pocket for the surrender and now plans to turn the building – not far from the life sciences hub of King’s Cross – into laboratory space. And with a scarcity of lab space in London and demand remaining strong, some anticipate that BL may well achieve a 50% premium on the rent it had secured with Meta.
So are offices going the way of retail? Maybe traditional offices, yes, but office buildings with the potential for conversion? Maybe not.
While landlords such as BL, Derwent and GPE might not add Prew to their Christmas card lists, they will – at least behind closed doors – admit he’s not wrong when it comes to real rental growth. There just isn’t any. Not really. Not when you factor in inflation, cost of construction, cost of capital. Even for those lovely green, amenity-rich and wellbeing-focused buildings. Yes, they will lease. Yes, there is strong demand for those assets and, yes, they will pay good rents for them. But factor in everything else the sector is having to navigate today, and those good rents still aren’t enough to make this an easy gig.
But should real estate be an easy gig? Last week I sat down with a gaggle of industry leaders to talk about the impact of the disastrous mini budget one year on. Hosted by the RICS as part of a series of events it is putting on to try to re-establish its relevance and reset its perception (more on that next week), the session brought Prestbury’s Nick Leslau, Aviva’s Ben Sanderson, BL’s Carter, JLL’s Stephanie Hyde and CBRE’s Clarence Dixon together to discuss what had happened to real estate post-Liz Truss and where the industry is headed.
You can read more about the discussion on page 16, but I’ll paraphrase for you here. The mini budget showed us how policymakers haven’t got a clue, but that the extended honeymoon period of free money and easy growth was due to come to an end anyway. What we have now in real estate is a return to having to work hard to make things work. It is the return of the graft and the grafter.
If you build it, they might not come. You have to build the right thing, you have to really understand market dynamics and where demand is coming from, you have to understand the economics and you have to really, really know property. A spreadsheet can get you so far, but rolling your sleeves up, getting your hands dirty and doing “proper” real estate work is how you will prosper. Good news for anyone terrified that AI is coming for your job, terrible news if you were hoping to coast through another decade of easy money.
I’m not sure where I sit with Prew’s view. Will offices go the way of retail? A decent amount probably will. But is that a bad thing? Look at retail now. It’s reset and, for many, is now performing strongly. Maybe that’s what our offices need too.
To send feedback, e-mail samantha.mcclary@eg.co.uk or tweet @samanthamcclary or @EGPropertyNews
