Employment in the Square Mile and demand for office space will continue to grow, with little evidence of a long-term pandemic hit. But the City of London could nevertheless be changing dramatically, according to a new report for the City Corporation, published today.
The report, by consultants Arup and Knight Frank, commissioned to inform preparations for the next City Plan, charts a continuing shift away from traditional Square Mile employment in banking and finance towards “emerging” jobs in the information and communication, professional services, scientific and technical sectors. Fewer sharp suits and more chinos and T-shirts perhaps.
And while it forecasts overall demand for office space up to the 2040s to remain strong, it warns that an increasing focus on high-quality “best of class” space – the so-called “flight to quality” – could leave the City’s significant number of lower quality offices facing a “perfect storm” of market aversion and high refurbishment and “retrofit” costs, putting them at risk of becoming “stranded assets”.
While finance jobs still dominate the Square Mile, change is already underway, the report says, with the number in that category set to decline. Emerging sector firms took up 29 per cent of office space in 2022/23 compared to 19 per cent for finance, and it is they who are projected to drive job growth over the coming two decades. City Hall’s forecast of a 13 per cent hike in job numbers by 2041 – an additional 85,000 workers – could be an underestimate.
To what extent will those workers be based in City offices though? With Tube ridership in the City now relatively steady at 68 per cent of pre-pandemic levels, and up to 75 per cent on Tuesdays, Wednesdays and Thursdays, the report sketches out three scenarios.
The first, “return of in-person”, could see office working reach 80 per cent of pre-pandemic levels, accompanying an ongoing “flight to quality”. The second, “hybrid peak”, suggests a continuation of the current pattern, while the third, a “new diverse city” model, posits a shift to spending just half the week in the office, with firms needing less space while maintaining their head counts.
All three scenarios envisage higher levels of overall demand for office space in the long term, with between six to 20 million square feet of extra space needed by 2042. The 2020s will nevertheless see an initial slowdown as employers “right-size” and providers struggle to keep up with “flight to quality” demands. Long lease “inertia” should mean a soft landing rather than anything more dramatic, the report suggests.
The Guildhall should focus on increasing the supply of top-quality offices and supporting the upgrading of existing lower grade space, targeting emerging as well as traditional sectors, while encouraging workers back to the commute and continuing to improve the wider City environment, it recommends.
That would mean not only investing in public transport and “active” travel, but also boosting “wider amenity”, including “improvements in public realm and retail as well as interventions such as arts, culture and entertainment programmes”.
But it is the challenge presented by that swathe of lower grade offices needing significant investment to meet the demands of the market which demands urgent action, the report states: “Intervention is needed to allow for fewer obstacles for older stock to be updated to meet office market needs, or to convert to other uses.”
It’s not a small problem. “Grade B” space accounted for only 2.2 per cent of all leasing market transactions in the City last year, with the pre-pandemic small business market for affordable space yet to recover. New energy efficiency standards due in 2026 will see some one million square feet of office space falling below minimum requirements, rendering them unlettable. There are more than 6,000 listed buildings in the Square Mile too, presenting additional challenges.
In a key recommendation, the report suggests relaxing the Guildhall’s current strict planning requirements designed to protect existing office space in order to encourage alternative uses for those assets to prevent them becoming stranded.
That recommendation will go to the Corporation’s Local Plan sub-committee next Tuesday, crucially with the backing of Guildhall planners. Councillors still need to agree, but the door could be opening to some big changes in the Square Mile.
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