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Empty Cities

There is no hiding from the data. In Leesman’s most recent Corporate Real Estate Leaders poll, carried out in the fourth quarter of 2022, 69% of respondents said they intended to reduce their real estate footprint over the next 18 months.

It is an extraordinary stat. And it is all the more incredible when you realise just how much office space that could mean long term.

According to Statista, in the fourth quarter of 2021 central London – the City, West End and the east – had 283m square feet of built office stock. By way of comparison, Birmingham has 18.6m sq ft, Manchester 20.5m sq ft and Glasgow 14.1m sq ft.

Let us assume, using a conservative estimate, that around half of London’s office-based companies are knowledge-based organisations. These are the companies most suited to, and most affected by, hybrid working.

If half of those organisations were to release around 40% of their real estate – again, more conservative estimates – we have calculated that a staggering 56m sq foot of workplace could fall vacant in the next five years. That is more than the total built office stock of the UK’s next three biggest cities combined.

Our research is not an outlier. In July, consultants McKinsey published a report into the impact of remote working on nine superstar cities: Beijing, Houston, London, New York, Paris, Munich, San Francisco, Shanghai and Tokyo. (McKinsey defines superstar cities as having a disproportionate share of the world’s urban GDP and GDP growth.)

Acknowledging that hybrid working was here to stay, with office attendance now 30% below pre-pandemic norms, the report warned that the shift was likely to wipe $800bn off the value of office buildings by 2030. Demand for office space in the nine cities is also likely to be 13% lower by the end of the decade than it was in 2019.

Indeed, office downsizing is already happening. In June 2023, HSBC – Europe’s largest bank – confirmed it was quitting its flagship 45-storey, Norman Foster-designed tower in Canary Wharf in favour of a smaller development in central London.

Much has happened in the two decades that HSBC’s illuminated logo has dominated Canary Wharf’s skyline, from the financial crisis to Brexit. But the latest upheaval, the pandemic, will arguably prove the most impactful: HSBC has attributed the move to hybrid working and cost cutting (it is targeting a 40% reduction in its global real estate).

But not all offices are equal. Many are noisy, poorly laid out and struggle to support productivity, the most basic purpose of a workplace.

When Covid-19 kept workers at home, these failings were thrown into sharp relief. Technology enabled home working, colleagues stayed seamlessly connected and people were able to personalise their workspace to meet their individual requirements, boosting productivity.

No wonder so many do not want to return to the office.

Ilir Nase, Lecturer in Real Estate, Planning and Environmental Management at the University of Manchester, says the owners of traditional office buildings are facing a triple threat: falling demand because of hybrid working, persistently higher interest rates and assets becoming legally obsolete. Changes to minimum energy efficiency standards came into force on 1 April. All non-domestic buildings must now have minimum Energy Performance Certificate of E to be lettable, rising to Grade B by 2030.

“Certain assets will weather these challenges,” argues Nase. “But office blocks from the ‘60s, ‘70s, and perhaps even the ‘80s, are at risk of becoming stranded.

“Affordability is not the key issue. The issue for new occupiers is 1) will this building fit my requirements, and 2) is it going to be legally obsolete in the next five or ten years’ time? These are the most important factors.

“We really need the creativity of architects and designers to help with these types of assets. They are the ones most at risk, and if you have areas in a city that have a concentration of these types of buildings, that is when you are going to start having issues.”

A pragmatic approach to planning is also vital if cities are to successfully adapt. “Policy and local government should definitely play a role,” agrees Nase. “We know how difficult the planning process can be. City leaders need to at least understand what is coming and try to speed up these processes.

“They have a duty to make cities liveable for both businesses and citizens alike.”

Valentine Quinio, Senior Analyst at the think tank Centre for Cities, similarly accepts that many companies will be looking to downsize into more suitable spaces.

But, she says, “I don’t think that means we’re going to see unoccupied offices units across city centres.

“There’s a rush towards high-quality office space: ones that enable a more flexible working space, and are higher quality in terms of environmental stands. HSBC was looking for a more sustainable office building.

“There are lessons to be learnt from the changes we’ve seen over the last three years. We need city centres to be more flexible, to adapt and change to new trends.”

Quinio argues that central business districts like Canary Wharf are more at risk, with mixed use areas likely to fare better. She points to the City of Westminster, with its flourishing mix of politics, business, residential and infrastructure, including schools and hospitals. The Square Mile, while it has considerably less residential property, also continues to prioritise both retail and leisure alongside its core office space and leading financial institutions.

Tellingly, Canary Wharf is already looking to become a more focused evening destination by hosting arts, music and theatre events alongside its traditional range of bars and restaurants. It is also actively looking to attract tenants outside of its long-standing base of finance, such as life sciences.

The City has also long been dominated by well-established, large firms, primarily in finance, insurance, real estate and legal. But Quinio believes companies outside of those sectors, including start-ups, could become increasingly attracted into traditional office-dense spaces such as the Square Mile, as demand shifts and space becomes both more flexible and more affordable.

“The two key things will be accessibility, from a public transport perspective, and flexibility, through changing ways of working and consumption production,” notes Quinio.

A report into home working from the US-based National Bureau of Economic Research (NBER) argued that cities become, and remain, successful by offering lifestyle and consumption opportunities that people value.

Those that don’t risk seeing their wealthiest citizens and businesses move away, hitting tax revenues and leaving them at risk of the sort of “downward spiral” seen to such catastrophic effect in some American cities in the 1970s.

Yet, says Quinio: “I’m optimistic about the future of city centres. We’ve seen a level of return that we didn’t predict even a couple of years ago.

“That’s because of the concentration of amenities that you cannot find elsewhere. That’s the unique role that cities play, and what they have to offer in terms of retail, leisure and production.”

The great office downsize is underway. Hybrid working is embedded; technological advances enabled it and the pandemic’s inadvertent mass social experiment proved it worked. According to the NBER’s, which surveyed full-time workers in 27 countries, in 2022 employers planned for staff to work from home an average of 0.7 days per work after the pandemic. Workers wanted 1.7 days.

Traditional office real estate will fall vacant. Some cities, and areas within cities, are more at risk of decline than others. Building workplaces and cities fit for the future will require developers, tenants and governments to work together.

But this is a rare opportunity to reimagine city living. As the NEBR report concludes: “Cities that respond with efficient management and sound policies will benefit – more so that before the pandemic.”