London’s empty offices a sign of looming UK property meltdown

Early on a Thursday evening, a birthday party is taking place high up in the Leadenhall Building in the City of London.

Opened in 2014, the Leadenhall, also known as The Cheesegrater because of its distinctive wedge shape, has 48 floors, providing almost 85,000 square metres of office space.

The party is a well-behaved affair, as befitting its senior lawyer host. He works there and it’s a chance for him to use the premises and for us to revel in the brilliant night-time vista of the UK capital’s skyline.

It’s spectacular, granted. But it is also tinged. All around us – despite the landmark architecture – is emptiness.

The tower seems devoid of people, apart from the security guards below. As we gaze across at the other towers, we can see into those that are brightly lit. Only a handful of folks are at their desks and even they seem to be packing up to head off.

The point is, it is not late, barely 6.30pm. In days gone by, at this time on a Thursday, these offices would still be heaving. Bankers, lawyers, accountants, insurers – they would be hunched over their screens or locked in meetings.

But that was pre-pandemic, pre-work from home. Up here, it’s obvious: London is not working, not like it used to.

London office occupancy rates are less than half preCovid levels in the UK, at about 35 per cent, according to Remit Consulting. This compares with pre-pandemic levels of 60 per cent to 80 per cent.

At hard-hit Canary Wharf in the east, they’re talking about turning over space set aside for offices to residential. That’s also true of some developments in Midtown and the

West End. It’s also the case in the UK’s regional centres.

But transforming somewhere that was intended as a working environment into sky-high living is easier said than done. Inevitably, it’s hugely expensive.

Surveys say London’s vacancy rate is about 9 per cent, but empirical evidence suggests that is an unrealistic, low figure. Even then, it’s the highest this century.

In New York, the picture, if anything, is worse, with studies suggesting 14 per cent of offices lying empty.

Not that the pavements are quiet. London, New York and elsewhere report bustling street-level traffic, with packed bars and restaurants. No, it’s up above and in the working areas where the problem resides.

In the US, alarm bells are ringing about the rising number of commercial mortgage defaults, amid fears they could lead to a new banking collapse. The National Bureau for Economic

Research estimates 44 per cent of all commercial real estate mortgages and 14 per cent of office loans are “underwater” – meaning the present property value is less than the amount outstanding.

High interest rates, low investment, weak employment figures, the cost of meeting green environmental regulations, Big Tech layoffs and remote or work from home arrangements all lean in one direction.

About $929 billion of outstanding US commercial real estate mortgages are due to mature this year. Most commercial real estate mortgages are interest-only – so the principle has still to be repaid or the loan has to be refinanced.

The fear is of defaults on those loans. If they reach 10 per cent, the bureau estimates that the market value of 231 US banks’s assets fall below the value of their customer deposits.

In the UK, the situation is little better. Citi analyst Aaron Guy predicts values of London offices will fall by nearly 40 per cent in the next two to three years and rents will almost halve.

According to his most recent research, London office values are down 26 per cent in the City and 14 per cent in the West End. Further falls are likely.

There is, though, a sense of denial and not just by estate agents. Plenty is being said and written about the impact on city centres – of unwanted offices alongside hard-hit bricks and mortar retailers, such as department stores.

Councils are fretting over the “doughnut effect”, of desolate middles and all the economic activity occurring on the peripheries.

Not enough, arguably, is being done to prepare for and counter what could be the next financial disaster.

The Bank of England maintains a commercial property downturn does not represent a threat to UK economic stability in the way that it did during the US housing crisis because borrowers are less indebted and UK banks are far less exposed. (UK pension funds, however, are heavy investors in domestic commercial property.)

On both sides of the Atlantic, unless people return to a fiveday working week, unless offices fill up again, shakedown, possibly meltdown, awaits.

The view from The Cheesegrater was captivating but far from pretty.

Office values are down 26% in the City and 14% in the West End, a recent study shows