London's Office Market Plunges: Meta's $181 Million Lease Dump Shakes Industry!

According to a note from investment bank Jefferies, London's office market is currently experiencing a "rental recession" as the amount of vacant space has reached its highest level in thirty years. In the City of London, the historic financial district, vacancies now make up 10% of the total office space, while in central London's West End, the figure is 7%, both being the highest in three decades.

Vacant units in Canary Wharf, a more recent financial district, now surpass 20%. According to Michael Prew, a property analyst at Jefferies, London offices haven't experienced such high vacancy rates since 1993 when the UK economy was in recession and the real estate market had collapsed.

Now, large portions of the formerly bustling business districts in the capitals are remaining empty as remote work continues to persist even three years after the pandemic. According to Jefferies, the utilization of office spaces in the city has decreased by 20% since the end of 2019 due to the increasing popularity and success of remote and hybrid work.

On Monday, October 10, 2022, in San Francisco, California, a worker can be seen inside an empty office and retail building. The city's office vacancies have reached a new high, surpassing their pre-pandemic levels by more than six times. This underscores the ongoing economic challenges faced by the renowned tech hub.

US office vacancies have reached a critical point, signaling a potential risk for banks. Investment bank downgraded the stock of four major property developers, including British Land and Derwent London, as office rents are expected to decline.

"Retail was the initial victim of technology, and we anticipate offices to be the next affected," Jefferies analysts stated. "Occupancy rates have decreased, causing landlords to lose their ability to dictate prices due to tenants divesting excess space."

A tech giant, Meta (formerly known as Facebook), is among the companies currently surrendering some of their leased space."

Packing up

British Land announced on Monday that Meta has agreed to pay £149 million ($181 million) to terminate its lease on a 310,000-square-foot office located near Londons Regents Park. In a press release, the developer stated that the tech firm will still be leasing another nearby building.

British Land stated that the decision is forecasted to result in a decrease of approximately 0.6 pence (0.73 cents) per share in earnings for the six-month period ending in March of next year. Notably, Meta is downsizing just three months following HSBC's announcement to relocate from its global headquarters in Canary Wharf to a smaller establishment in a more central location in London.

Canary Wharf, located in the former docklands of east London, is experiencing increased rental pressure. According to reports, more bankers are leaving the area as UBS begins transferring employees from Credit Suisse to its primary London office in the City. Credit Suisse, previously a tenant at Canary Wharf, was acquired by UBS in a rescue takeover earlier this year. Additionally, Clifford Chance is expected to vacate the estate by 2028 and instead move to a smaller location within the City.

Regulators are closely monitoring the commercial real estate market for any indications that the rising vacancy rates and declining rents could potentially trigger the next financial crisis. In recent months, investors and regulators have cautioned that banks lending to developers may experience significant losses due to the decline in property values. Jefferies analysts have highlighted that the uncertainty in rent has led to shrinking investment market liquidity and reduced profitability for developers.

The office rental market in London is experiencing a significant decrease, which is drastically different from the high demand and limited supply in the residential rental market. In August, rental property prices saw a substantial annual increase of over 17%, which was also observed in April. These were the largest surges recorded since 2014 when real estate agency Hamptons began collecting the data.