London office space demand is crashing, warns Goldman Sachs

Deals in the sector down 40 per cent compared to before the pandemic

A growing shift towards hybrid work is impacting demand for offices. Getty

Demand for office space in London is crashing and analysts believe the situation is set to get worse.

Goldman Sachs says deals in the sector are down 40 per cent compared with pre-pandemic levels and with new offices being built the situation is set to deteriorate.

It comes amid a growing shift towards hybrid working following the pandemic.

Deal activity in the sector has slumped near global financial crisis-era lows, while a spike in the supply of new offices will weigh on rental prices, Goldman Sachs analyst Jonathan Kownator said.

“We are increasingly cautious on the outlook for London office capital values,” he said.

“Sentiment towards owning office assets remains low.”

The property sector has suffered this year as interest rates have surged, while commercial and office real estate firms have also been grappling with the shift towards hybrid working models since the pandemic.

A looming wall of bond maturities is also a big issue with real estate companies set to face refinancing large debt loads at much higher rates, Mr Kownator said.

British Land Co, whose City of London tenants include UBS Group AG and TP ICAP Group Plc, last month marked down the value of its portfolio by 12 per cent.

The landlord was also demoted from the blue chip FTSE 100 index in May after its shares fell 35 per cent in a year.

A survey from real estate agents Knight Frank showed that half of large multinational companies plan to reduce office space as they adjust to hybrid working patterns, although the cuts are likely to be modest as few plan to go fully remote.

Knight Frank said 50 per cent of employers with more than 50,000 staff intended to reduce office space by 10 per cent to 20 per cent in the next three years as they reassess their needs.

“For most occupiers an office-centric approach in a more flexible environment will require a fundamental reworking of the workplace,” Knight Frank executive Tim Armstrong said.

Commercial property construction has held up better than residential construction in Britain in recent years, but both sectors are now being challenged by higher interest rates.

Antony Antoniou, CEO of real estate firm Robert Irving Burns, said he saw a risk of recession as businesses focused on managing debt rather than investing for growth.

Property development and investment firms British Land and Land Securities last month flagged headwinds from interest rate rises as well as uncertainty from the change in working patterns.

Data from real estate adviser Cushman & Wakefield said office tenants signed nearly 600 new leases over 465 square metres last year but the premises were smaller than before the pandemic.