“People are finally getting to grips with the fact that there is total undersupply of office space in the City,” says James Neville, partner in the City leasing and development team at Allsop.

New dawn: upgrading secondary office stock could boost London’s central activities zone by £84bn

He is responding to ‘Space for Change’, a London Property Alliance (LPA) and Knight Frank report that reveals upgrading secondary office stock could boost the gross value added to London’s central activities zone (CAZ) by £84bn. “Investors – that’s who the message needs to be fed through to,” he adds.

Many in the market are frustrated that it has taken so long to notice the supply shortage, while agents are pondering where new requirements will be housed.

The report reveals that total CAZ office stock fell from 213m sq ft in 2018 to 199m sq ft in 2023, while a British Council for Offices (BCO) study highlights a widening gap in availability of high-spec, sustainable offices in smaller regional cities, echoing London’s problems.

As BCO chief executive Sam McClary writes in this issue (p22), urban local authorities should treat their city’s office stock as a portfolio to be upgraded, with value added through retrofitting.

For London, the Knight Frank report zones in on the economic potential that office development could have, stating that upgrading older space could create £11.4bn of annual rental income and £262bn of investment value.

“We wanted to demonstrate the positive impact of upgrading buildings and that there are genuine productivity gains from people working in good offices,” says Andrea Williams, director, policy and communications, at the LPA. “We feel the message often gets lost between the industry and policymakers who don’t necessarily have access to these buildings or understand how that productivity works.”

The LPA calls for major office schemes to be classed as critical economic infrastructure. Its report also argues that office demand hasn’t disappeared, but has climbed the quality ladder.

We will potentially lose big occupiers to Paris, Amsterdam or Madrid
Shabab Qadar, Knight Frank

Shabab Qadar, Knight Frank’s head of London research and author of the report, says: “Most companies require staff to be back in the office, especially those that downsized immediately after lockdown. There is a very strong correlation between people working in a best-in-class office and productivity growth.

“The fact that there is all this almost redundant stock on the doorstep of places in strong demand to me demonstrates a systemic failure,” Qadar adds.

“The report isn’t just for developers; it is for policymakers or anyone with a stake in the London real estate market.

“There is an issue around large occupiers wanting to be where they can agglomerate with like-minded occupiers. If that space doesn’t exist, we will potentially lose some of these big occupiers to Paris, Amsterdam or Madrid.”

The fear, Qadar says, is that office stock is being repurposed, with planning and regulatory hurdles threatening development viability.

The report states: “Planning authorities should reduce and streamline the costs, obligations and regulatory requirements placed on schemes, concentrating on what is genuinely essential for viable delivery.”

The report also questions why the office market hasn’t kept pace with occupier demand. Is this down to slow planning and red tape, or a wider issue of economic confidence in the UK?

Not a planning issue

“If there’s such a demand and need for offices, there’s plenty of places [where refurbishment] can be done – so why isn’t it happening?” says Grant Leggett, executive director of property company Boyer. “I don’t think it’s a planning issue. I think it’s a macro-economic issue about weighing the risks of development when there’s economic uncertainty about London, where build costs remain ridiculous.”

Leggett says the National Planning Policy Framework (NPPF) already places a great deal of positive emphasis on office development. “Economic benefits [of development] are baked into paragraph eight of the NPPF,” he says. But he believes a lack of understanding of the benefits of office development by decision-makers such as councillors is an issue.

Leggett adds that the UK construction industry has been hit by higher costs of labour and imported materials as a long-term impact of Brexit. The question is whether the return on office schemes is worth the cost.

Allsop’s Neville says that often, the cost-benefit ratio doesn’t favour redevelopment. “Part of that balance is what a developer has to do to get buildings up to standard. We have a whole series of campus buildings and are asking: what’s the likely return?”

He says some costs can be recovered through service charges, but landlords have other costs to consider. “How much are you enhancing your rental value? About £15 to £20/sq ft?” he says. “You need a significant commitment from the landlord to see a fundamental shift in rental yields. A lot of landlords we work with, [including] many overseas, do not want to put their hands in their pocket for that cash at the moment.”

Solving the office shortage could pay dividends for a Labour government still chasing elusive economic growth. Arguably, the government would benefit from an economic equivalent of its new towns programme for UK offices. Building confidence in the UK’s economy, or London’s, would also certainly help.

“We hope the new London Plan will consider some of the points we raised in our report,” the LPA’s Williams says, noting how the new plan will guide individual boroughs on their own planning and strategic decision-making and stating that it needs a co-ordinated approach.

Looking at the impact of the Elizabeth line on London’s office stock, it can be argued that in some locations, such as Farringdon, demand has outstripped ambition. Any new London Plan could recognise the potential hotspots.

“Over the past five years, areas where demand [for offices] is strongest are also where there is greater availability of secondary buildings,” Qadar says.

“So those are immediate opportunities to try and replenish or improve the quality of the offices, but also capture some of the demand that exists around those Elizabeth line nodes.”

As the BCO report notes, UK regional cities need a paradigm shift in attitudes, or they face falling behind the wider office market. London arguably faces the same challenge globally.

“We’re not against losing office space,” Qadar adds. “We’re against losing office space and not replenishing it.”

Solving that conundrum may prove key to central London’s office economy.