Back to the office, say bosses. Thank goodness for that, say property firms | Commercial property

Carl Pei, co-founder and chief executive of smartphone firm Nothing, recently told staff that from October they would be expected to be back at their desks in its London HQ five days a week.

“I know this is a controversial decision that may not be a fit for everyone,” he said in a LinkedIn post that attracted hundreds of comments. “This is a company for grownups, so if you need to be out of the office to deal with some issues, we trust you to make the right decision … We know it’s not the right type of set-up for everybody, and that’s OK.”

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 applied from 21 October.

It is not the only technology company to mandate a return to office working this autumn. Amazon said this month that from 2 January its employees, who had been going in three days a week, would be requited to work in the office five days a week.

Other companies, including retailer Boots, have told administrative staff to return to the office five days a week from this month. Santander has advised 10,000 UK office workers that the current guideline of two to three days in the office will change to an obligatory 12 days a month from the end of 2024. And accountant PwC is to start tracking the locations of its 26,000 UK staff to ensure they spend at least three days a week in the office or at client sites.

This flood of workers returning to central London comes after a brutal two-year downturn for the UK office property market, with a fall in office valuations exacerbated by uncertainty about future demand for space because of more home working, as well as higher interest rates.

Values for London office property fell by 20% between the second quarter of 2022 and the second quarter of 2024, according to research company MSCI, which reports that in the same period asset values of office property in the wider UK were down 23%.

At the same time, vacancy rates for office properties have risen. Mark Stansfield of property data company CoStar says the number of empty offices in the capital is still rising as we head into the last months of 2024.

“London’s vacancy rate stands at 10%, a 20-year high and up from about 5% when the pandemic struck, though still well below the circa 14% level seen in New York,” he says, though he points out that rental demand for five-star office buildings in central London remains strong. Away from the centre, vacancy rates in Hammersmith are about 19.3% and Docklands about 16.2%, CoStar says.

The downturn has even hit once-premium locations such as Canary Wharf, owned by Brookfield Properties and the Qatar Investment Authority. HSBC has said it plans to move its global HQ from the 45-floor skyscraper at 8 Canada Square in late 2026 to a smaller building near St Paul’s Cathedral. Other companies planning to quit the area include law firm Clifford Chance.

Earlier this month, Canary Wharf debt was cut to junk status by rating agency Fitch, which said this reflected mainly the short-term risk of its £350m of bonds, which are due to be refinanced in April 2025. Canary Wharf did not respond to requests for comment.

There is still uncertainty about how hybrid working will affect demand. Staff in London have been slower to return to the office than in cities such as Paris and New York. The Centre for Cities thinktank studied six major cities and found staff in central London spent on average 2.7 days a week in the office while workers in Paris were in 3.5 days a week.

“Paris is a much more dense city,” said Paul Swinney, director of policy and research at Centre for Cities. “Here in Britain we have more space and people are more likely to have a big house in Hampshire or Buckinghamshire and be able to work in their spare bedroom. London seems more relaxed about [back to the office] mandates … In some cities mandates are lower but people are less likely to ignore them.”

Some global investors remain gloomy about the future for office property. This is particularly true in the US, where office values in cities such as San Francisco have fallen  dramatically.

But some in the UK are more hopeful. “The sector has been very 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 downturn is well priced in and there is sentiment on the cusp of turning for the better. Offices have been hit very hard – too hard.”

Du Sautoy says that while values for warehouse space hit a low in 2022 and have since recovered, office property valuations “were hit hard and then carried on being hit”.

Only a handful of London office buildings sold for more than £100m in the first half of 2024. However, Brookfield has put Citypoint, a landmark 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 property sector in the first half of 2024 totalled £4.2bn, down from £5.4bn in the first half of 2023, according to MSCI.

Analysts say landlords, who typically took out loans at a time of lower interest rates, are holding on to properties rather than selling – which would crystallise any losses – even if they have to inject more equity when refinancing at higher rates. Some older office space will also need expensive upgrades to meet more stringent environmental standards set to come into force in 2030.

Some believe the office property market has changed permanently as technology enables a shift to hybrid working. Mark Dixon, the founder and chief executive of International Workplace Group (IWG), a co-working group which owns the Regus and Spaces brands, said he is planning to open 100-120 new flexible work spaces next year.

But others think the rise in back-to-work mandates means office values may be at a turning point. A new study by consultancy KPMG found 83% of UK chief executives 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 are likely to reward employees who come into the office, up significantly from 56% in 2023.

But property groups are not just waiting and hoping. Canary Wharf has changed some office space to mixed and residential use – more than 3,500 people now live in the area – and is attracting life science and educational tenants, not just financial services companies.

As has been said, demand for top-quality office space is reliable. CoStar noted record rents recorded on several recently completed buildings around Elizabeth Line stations at London’s Bond Street and Farringdon.

Du Sautoy says developers are adding roof terraces, event spaces and collaborative areas 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 will go back to five days. If a company is willing to accept an office that is underoccupied one day a week, that will not affect their property decisions.”