Ch-ch-changes. There’s gonna have to be a different plan

It is a shame that the CEOs of the major UK REITs did not heed David Bowie’s prescient words in 1999. “I think the potential of what the internet is going to do to society, both good and bad, is unimaginable,” Bowie told BBC Newsnight’s Jeremy Paxman at the time. “I think we’re actually on the cusp of something exhilarating and terrifying.”

Nothing has had as big an impact on the real estate sector as the internet. Pre-internet, the listed property company titans were Land Securities, British Land, Hammerson and Capital Shopping Centres (later intu). Today, six of the largest 10 are companies are focused on sectors not affected by the internet, not adversely anyway, and are providing space that people actually need rather than just want: SEGRO (logistics), Unite (student accommodation), Tritax Big Box (logistics), Big Yellow (storage), Safestore (storage) and Grainger (rented housing). Three companies lurking just outside the top 10 are LondonMetric (logistics), Assura (healthcare) and Primary Health (healthcare).

The internet’s detrimental effect on the retail sector has been the most obvious. Retail spending in the UK is now 36% online, which explains the ecommerce-driven surge in the logistics sector, SEGRO’s rise to the top of the size ranking and the decline of retail-heavy LandSec, British Land and Hammerson and  the demise of intu.

The impact on the office sector is now becoming apparent. The internet started to enable office workers to work from home, but it was not a trend until Covid and the subsequent use of Zoom and Teams took hold. Now, office occupation is just 29%, compared with 65-70% pre-Covid.

Two weeks ago, Clifford Chance agreed to pre-lease 321,100 sq ft of office space in the City from GPE, but the flexible nature of the deal should be a warning to landlords about occupiers’ uncertainty about their future office requirements. The pre-let comprises separate 20-year leases with multiple break clauses, plus an option for Clifford Chance to hand back 89,000 sq ft of space by March 2024. The headline rent is £77/sq ft, but there is a 38-month rent-free over the first 15 years plus an additional three months if the break is not exercised. Although the deal is undoubtedly a great result for GPE, it shows that landlords are having to offer increasingly flexible lease structures and generous incentives in order to secure substantial pre-lets with high quality occupiers, as Stifel analyst, Sam King, points out.

Clifford Chance will be moving back to the City from Canary Wharf when its 25-year lease expires in 2028, signalling the reverse of the exodus of companies from the City to Canary Wharf in the late ‘90s and early noughties.

Canary Wharf and the Clifford Chance situation are a perfect example of the internet-driven evolution of the office sector. When Clifford Chance first moved out to Canary Wharf in 2003, it leased three times as much space, 1m sq ft, as well as an onsite gym for free, swimming pool and restaurant. However, this soon proved to be excessive even pre-Covid, with the firm subletting 400,000 sq ft of the space in 2015 to Deutsche Bank.

Canary Wharf Group, to its credit, is trying to adapt the estate to the times. There are new plans for a “green spine” designed by the architects of the Eden Project, with gardens meandering through. As the group’s chief executive, Shobi Khan, told the Evening Standard in April: “This is Canary Wharf 3.0. 1.0 was the traditional, big financial centre, 2.0 was eight years ago when we started embarking on residential construction, now 3.0 is the greening, plus adding more leisure, restaurants, entertainment — electric go-karts starting soon — and activating the water”.

There are still opportunities to make money in the office sector – for example, providing flexible workspace and turning eco-unfriendly “brown” buildings into A and B-rated “green” ones that occupiers want. And the two listed London office specialists, GPE and Derwent London, are still doing a good job for now. But, sadly, offices are looking like the new retail. They are under pressure, their golden years are behind them and they are falling out of fashion.