by Carl Pei, co-founder and CEO of smartphone company Nothing, recently told staff that from October they are expected to return to their desks at the London headquarters five days a week.
“I know this is a controversial decision that may not be for everyone,” he said in a LinkedIn post that attracted hundreds of comments. “This is an adult business, so if you need to be out of the office to resolve issues, we trust you to make the right decision… We know this isn’t the right setup for everyone, and that’s okay.”
Pei declined to comment on the post, but Nothing, which designs and sells smartphones and wireless earbuds and has attracted high-profile investors including singer-songwriter The Weeknd, confirmed the policy, which was implemented as of Oct. 21.
It is not the only technology company that is mandating a return to the office this fall. Amazon said this month that its employees, who had been coming in three days a week, would have to work in the office five days a week starting Jan. 2.
Other companies, including retailer Boots, have told administrative staff to return to the office five days a week from this month. Santander has told 10,000 UK office workers that the current guidance of two to three days in the office will change to a mandatory twelve days per month from the end of 2024. And accountant PwC will track the locations of its 26,000 British employees to ensure that they are at the office or with clients at least three days a week.
This flow of workers returning to central London comes after a brutal two-year downturn in the UK office market, with a decline in office valuations exacerbated by uncertainty about future demand for space due to more working from home and higher interest rates.
The value of office property in London fell by 20% between the second quarter of 2022 and the second quarter of 2024, according to research firm MSCI, which reports that in the same period the value of office property in the wider UK fell by 23%.
At the same time, the vacancy rate of office buildings has increased. Mark Stansfield of property data company CoStar says the number of vacant offices in the capital is still rising as we enter the final months of 2024.
“London’s vacancy rate is at 10%, the highest level in two decades and up from around 5% when the pandemic hit, but still well below the level of around 14% in New York,” he says , although he points out that rental demand for five-star office buildings in central London remains strong. Outside the centre, the vacancy rate in Hammersmith is around 19.3% and in Docklands around 16.2%, says CoStar.
The recession has even hit locations that were once premium, such as Canary Wharf, owned by Brookfield Properties and the Qatar Investment Authority. HSBC has said it plans to move its global headquarters from the 45-storey skyscraper at 8 Canada Square to a smaller building near St Paul’s Cathedral by the end of 2026. Other companies planning to leave the area include law firm Clifford Chance.
Earlier this month, Canary Wharf’s debt was downgraded to junk status by ratings agency Fitch, which said this mainly reflected the short-term risk of its £350 million of bonds, which will be refinanced in April 2025. Canary Wharf did not respond to requests for comment.
There is still uncertainty about how hybrid working will impact demand. Staff in London are returning to the office more slowly than in cities such as Paris and New York. The Center for Cities think tank studied six major cities and found that staff in central London spent an average of 2.7 days a week in the office, while workers in Paris spent 3.5 days a week.
“Paris is a much denser city,” says Paul Swinney, director of policy and research at Center for Cities. “Here in the UK we have more space and people are more likely to have a large house in Hampshire or Buckinghamshire and be able to work from their spare room. London seems more relaxed about it [back to the office] mandates… In some cities the mandates are lower, but people are less likely to ignore them.”
Some global investors remain gloomy about the future of office real estate. This is especially true in the US, where the value of offices in cities like San Francisco has fallen dramatically.
But some in Britain are more hopeful. “The sector has been much maligned,” says Oliver du Sautoy, senior director and head of research at commercial property agency Lambert Smith Hampton. “It looks like there are opportunities. Investors think the recession is well priced in and sentiment is about to turn for the better. Offices have been hit very hard, too hard.”
Du Sautoy says that while warehouse space values bottomed out in 2022 and have since recovered, office property valuations “were hit hard and continued to be hit afterward.”
Only a handful of London office buildings sold for more than £100 million in the first half of 2024. However, Brookfield has put Citypoint, a Grade II listed tower on the northern edge of the city, up for sale for £500m in what is seen as a major test of investor sentiment. Deals in the UK office real estate sector totaled £4.2 billion in the first half of 2024, up from £5.4 billion in the first half of 2023, according to MSCI.
Analysts say landlords, who typically borrowed during times of lower interest rates, are holding on to properties rather than selling them – which would crystallize any losses – even if they have to inject more equity when refinancing at higher interest rates. Some older office spaces will also need expensive upgrades to meet stricter environmental standards that will come into effect in 2030.
Some believe that the office real estate market has changed permanently as technology enables a shift to hybrid working. Mark Dixon, the founder and CEO of International Workplace Group (IWG), a co-working group that owns the Regus and Spaces brands, said he plans to open 100 to 120 new flexible workspaces next year.
But others believe the increase in back-to-work mandates means office values may be at an inflection point. A new survey from consultancy KPMG shows that 83% of UK CEOs believe there will be a return to pre-pandemic ways of working within three years, up from 64% in 2023. Just over 80% say they will who come to work are likely to reward. to the office, up significantly from 56% in 2023.
But real estate groups don’t just wait and hope. Canary Wharf has converted some of its office space to mixed and residential uses – more than 3,500 people now live in the area – and is attracting tenants from the life sciences and education sectors, not just financial services firms.
As mentioned, the demand for top-quality office space is reliable. CoStar recorded record rental prices for several recently completed buildings around London’s Elizabeth Line stations at Bond Street and Farringdon.
Du Sautoy says developers are adding rooftop terraces, event spaces and collaboration spaces to help employers attract workers back to the office.
“There may be an extra push for four days,” he says. “I don’t think we’ll go back to five days. If a company is willing to accept an office that is understaffed one day a week, that will not impact their real estate decisions.”
