London landlords struggle to shift office space due to high rates and hybrid work

Landlords have struggled to shift large London offices this year, as nerves over hybrid working and higher interest rates continue to plague the upper end of a market.

Only a few office buildings in London have sold for over £100m in the first half of the year, an analysis from CoStar found, none of which were in the City.

Property giants Great Portland Estates (GPE) and Derwent have both put expensive buildings on the market only to find deals fall through or that they have to pull them from the market after offers fell short of expectations.

The higher interest rate environment of the last two years has pushed down on top line prices of commercial property, as market players struggle to afford the upfront cost of the property and any credit servicing.

The ill-effects have been particularly profoundly felt in the office space, which as well as having to battle with higher borrowing costs, have also been subject to uncertainty around firms’ need for large office space due to the rise in hybrid working.

Investors who bought a large space ten years ago would likely have to sell today at a loss, according analysts at MSCI. Consequently transactions are down dramatically, with sellers reluctant to stomach a loss and buyers unable to afford both the cost of credit and the deal itself.

Leases are beginning to pick up, however, with Savills announcing last week that, after a “strong” 2023, it had let out 2.79m sq ft of office space in the Square Mile in the first half of the year; a 19 per cent increase on the Covid-affected five-year average.

Ben Young, found of George Capital, told City A.M.: “We have a conviction in the London office sector and noted that investment transactional volumes remain below the long term average.

“However, capital is returning to the central London office market and there are increasing signs of liquidity for the right stock.”

While Julian Sandbach, head of central London office markets at JLL, told the Financial Times: “Owners know that liquidity in a lot size over £150m is really, really difficult. There will be a whole raft of stuff out there thatt is not suitable for current market conditions.”