City of London's empty offices are gripped by a growing real estate crisis

Early on a Thursday evening, a birthday party is taking place high up in the Leadenhall Building in the City of London . Otherwise known as The Cheesegrater because of its distinctive wedge shape, the Leadenhall is one of the biggest buildings in the financial district. Opened in 2014, it has 48 floors, providing almost 85,000 square metres of office space. The party is a well-behaved affair, as befitting its senior lawyer host. He works there and it’s a chance for him to use the premises and for us to revel in the brilliant night-time vista of the UK capital’s skyline. It’s spectacular, granted. But it is also tinged. All around us – despite the landmark architecture – is emptiness. The giant Leadenhall Building seems devoid of people, apart from the security guards below. As we gaze across at the other towers, we can see into those that are brightly lit. Only a handful of folks are at their desks and even they seem to be packing up to head off. The point is, it’s not late, barely 6.30pm. In days gone by, at this time on a Thursday, these offices would still be heaving. Bankers, lawyers, accountants, insurers – they would be hunched over their screens or locked in meetings. But that was pre-pandemic, pre-work from home. Up here, it’s obvious: London is not working, not like it used to. What we can see, don’t forget, is prime commercial real estate . At the bottom are the secondary streets and the lesser blocks. Sure enough, later, on the way home, our taxi passes doors with heavy chains across them, litter on the front steps, windows that could do with a clean, and rooms that have not been fully occupied for years. Down here, there is a marked air of abandonment and decay. London office occupancy rates are less than half pre-Covid levels in the UK, at about 35 per cent, according to Remit Consulting. This compares with pre-pandemic levels of 60 per cent to 80 per cent. With midweek remaining the peak time for attendance, rates can go below 20 per cent on Fridays. At hard-hit Canary Wharf in the east , they’re talking about turning over space set aside for offices to residential. That’s also true of some developments in Midtown and the West End. It’s also the case in the UK’s regional centres. But transforming somewhere that was intended as a working environment into sky-high living is easier said than done. Inevitably, it’s hugely expensive. If landlords want to recoup their outlay, they will have to aim these new apartments at the top end. Is the demand really there? London and the other cities are already awash with luxury residential towers and conversions. No, what we saw at the Cheesegrater was proof of a growing crisis. It’s also something of an elephant in the room. Commercial agents, who specialise in talking up, never down, prefer to dwell on the new, state-of-the-art, high-spec, green projects that reflect modern hybrid working, offering shared, flexible accommodation. It’s hard to get them to admit, let alone focus on, what is clearly a looming issue. Surveys say London’s vacancy rate is about 9 per cent, but empirical evidence suggests that is an unrealistic, low figure. Even then, it’s the highest this century. In New York, the picture, if anything, is worse, with studies suggesting 14 per cent of offices lying empty. Not that the pavements are quiet. London, New York and elsewhere report bustling street-level traffic, with packed bars and restaurants. No, it’s up above and in the working areas where the problem resides. In the US, alarm bells are ringing about the rising number of commercial mortgage defaults, amid fears they could lead to a new banking collapse. The National Bureau for Economic Research estimates 44 per cent of all commercial real estate mortgages and 14 per cent of office loans are “underwater” – meaning the present property value is less than the amount outstanding. High interest rates, low investment, weak employment figures, the cost of meeting green environmental regulations, Big Tech layoffs and, of course, remote working and WFH – which appear to be permanent or at the very least are proving hard to dislodge – all lean in one direction. This year will see some $929 billion of outstanding US commercial real estate mortgages due to mature. Most commercial real estate mortgages are interest-only – so the principle has still to be repaid or the loan has to be refinanced. The fear is of defaults on those loans. If they reach 10 per cent, the National Bureau for Economic Research estimates that 231 US banks will see the market value of their assets fall below the value of their customer deposits. A contributor to the study, Columbia Business School professor Tomasz Piskorski, claimed: “Because of high interest rates, there are dozens to hundreds of banks that are at the brink of solvency. "So, this additional commercial real estate distress puts them into the group of banks that potentially are susceptible to runs by depositors.” In the UK, the situation is little better. Citi analyst Aaron Guy predicts values of London offices will fall by nearly 40 per cent in the next two to three years, and rents will almost halve. According to his most recent research, London office values are down 26 per cent in the City and 14 per cent in the West End. Further falls are likely. There is, though, a sense of denial and not just by estate agents. Plenty is being said and written about the impact on city centres – of unwanted offices alongside hard-hit bricks and mortar retailers, such as department stores. Councils are fretting over the “doughnut effect”, of desolate middles and all the economic activity occurring on the peripheries. Not enough, arguably, is being done to prepare for and counter what could be the next financial disaster. The Bank of England maintains a commercial property downturn does not represent a threat to UK economic stability in the way that it did during the US housing crisis because borrowers are less indebted and UK banks are far less exposed. (UK pension funds, however, are heavy investors in domestic commercial property.) The Bank’s argument may soon be put to the test. On both sides of the Atlantic, unless people return to a five-day working week, unless offices fill up again – and there is precious little sign of any serious change, despite the best efforts of some employers to persuade staff back to their desks – shakedown, possibly meltdown, awaits. The view from The Cheesegrater was captivating but far from pretty.