Springtime Commercial Property Update for Charities

Welcome to TSP’s springtime commercial real estate update for charities.

Here’s what’s happening in the world of commercial real estate and what charities are doing to respond.

This month I’m looking at:

• Why values have fallen
• Why rightsizing continues in the leasing market.
• Occupier trends: How to benefit from today’s market.

During 2023, the Bank of England base rate rose to 5.25%, which is the highest in 16 years.

Higher rates mean that property values fall, but not straight away because real estate moves slowly. So, although the bulk of rate rises happened in 2023, the results are only just filtering through to the market.

Commercial property is not regularly valued or ‘marked to market’. Plus, only a small proportion of the overall stock trades at any one time. This leads to sudden changes in value, and we’ve seen this downside trend recently.

People are not selling unless they have to. Investors are refinancing (‘extending and pretending’), and the only offices on the market are those in real distress. These assets are being quietly sold ‘off market’.

The latest research confirms that the market was in the doldrums last year. The total value of offices sold in 2023 was just £5bn, which is about 70% lower than the 10-year average of £16.2bn. Things haven’t improved so far this year.

Some offices are available at 2014 prices

And there have been some eyebrow-raising transactions where equity was absolutely eviscerated:

• Mitsubishi bought an office on Shaftsbury Avenue late last year for £148mn. It was last transacted in 2018 for £ 267mn. That’s a £ 119mn loss.
• A 313,000 sq. ft. office in Canary Wharf went under for £110m in February. The current owner purchased it for a reported £ 270mn in 2017, so a £ 160mn loss.

These are extreme examples, and the West End is generally faring okay.

But it’s safe to say the capital market is as tough as ever at the moment.

I’ve been asked a few times this year whether we are at the bottom of the market.

I believe we are getting there. Offices are oversold, and there are some tremendous bargains out there (see above).

But I understand why many charities I’m talking to are thinking about selling. Offices are no longer a passive investment, and eco-legislation means that buildings will need major investment over the next 5 years. None of that is cheap. And with the sector embracing remote working like no one else, it’s hard to justify the cost of a large and under-used office.

Meanwhile in the leasing market, trends haven’t changed…

• Occupiers are taking smaller, better spaces
• Well-located, amenity-rich, flexible offices are thriving
• Less commutable places like Stratford are struggling, and this partially explains the 9%+ vacancy rate in London
• UK office take-up fell by 27% in Q1 this year
• Occupancy levels have stabilised at around 30-35%, much lower than pre-pandemic estimates of 50-60%.

The charities I work with are all downsizing. Some have even implemented a 4-day work week.

One new trend is that some are embracing ‘commercial’ coworking buildings like Fora or Labs here in London. 5 years ago I never saw this because the economics didn’t work. The business rates were not usually separated, making this type of space very expensive for non-profits.

However in the downsizing era, charities value shared meeting rooms and other communal spaces. These help to justify the cost and create genuine overall savings for clients.

For example, this quarter, we found space for the Imperial Health Charity in a flex office in Paddington. It’s nearly 60% smaller than their last office, but in a much better location, and the managed setup reduces the office admin burden on staff.

Of course, the price per sq. ft. is higher, but the overall cost is far lower, meaning a big savings plus an office upgrade for the charity.

Outsourcing office management is another trend

This is a private sector trend that non-profits should note: Some companies are emerging from serviced spaces that they occupied during the pandemic. They want to control their own culture and be ringfenced within their own space rather than get stifled by a coworking space.

These companies are taking ‘conventional’ leases but outsourcing the office management to specialists. TSP’s property managers have been doing this for the last 4 years, and we recently received mandates from Pizza Hut and branding agency Koto Studio.

Several companies are addressing this demand, meaning the amount of available flex space continues to increase.

Where are the opportunities?

I believe we are in a golden era of opportunity for charities:

• There is a plentiful supply of office space and landlords are nervous about voids
• The quality of space on offer has improved, meaning the value proposition is at an all-time high
• Long rent-free periods and generous incentive packages are available for both new offices and lease renewals
• Landlords appreciate the dependable, low-risk income from non-profits

Moreover, for those brave enough, this is a rare opportunity for charities to purchase Central London real estate at an attractive entry price.

Take this client for example – They are approaching the end of a 15-year lease and are clearly long-term occupiers. They need premises for the next 10 years at lease. So why not buy something? The cost is lower than renting, and after 10 years, they will have an asset to sell, and there is a strong chance that it will increase in value during that time.

This does not mean you should just “buy anything”

Real estate is a long-term strategic decision that you must consider carefully. Remember, real assets are not passive these days, and there’s a higher risk of obsolescence. But for well-capitalised charities, this year is the ideal time to consider buying high-quality real estate.

Thinking about your own property strategy?

Send me an email, call 020 7284 9040 for a chat, or connect with me on LinkedIn