With the London office market vacancy rate at a 20-year high of 9.2%, and Canary Wharf particularly struggling, news that key office tenant Barclays Bank is staying at its UK HQ at One Churchill Place, extending its lease by five years to 2039, is a welcome commitment.
Canary Wharf was reeling earlier this year when HSBC, which has occupied 8 Canada Square since 2002, announced it was upping sticks to move near St Paul’s Cathedral by 2027 when its current lease expires. The bank said it was part of a plan to downsize amid more flexible working patterns.
Little wonder Canary Wharf Group is taking the chance to hit back after Barclay's decision to remain.
John Mulqueen, chief investment officer, said: ‘We are delighted Barclays extended its lease at One Churchill Place demonstrating its commitment to Canary Wharf, and investing in the building for the long term.’
‘Businesses want their offices close to a range of leisure and amenities to help attract and retain talent. Canary Wharf is a 15-minute city with access to great transport links, access to 16.5 acres of parks and a wide range of amenities and cafes, bars and restaurants.'
The agreement between Canary Wharf and Barclays is twofold. The parties have agreed changes to lease arrangements at both 10 Cabot Square and One Churchill Place.
At 10 Cabot Square where Barclays also has a lease, the terms are being varied allowing a sub-lease over the property.
The proceeds from this amendment will be used to redeem £263.5 mln of notes under an existing CMBS securitisation, with the remainder being used for general corporate purposes. Following this transaction, 10 Cabot Square - which is also refered to as 5 North Colonnade - will no longer be secured under the securitisation.
Canary Wharf will reposition 10 Cabot Square to meet the 'increasing demand for high-quality sustainable office and life science uses', as well as providing 'an opportunity to add mixed uses' such as hotel, education and leisure according to Mulqueen.
In a separate transaction, Barclays is extending the lease of its UK HQ at One Churchill Place by five years to 2039.
Alastair Blackwell, chief operating officer at Barclays Execution Services, said: ‘After announcing our intention to exit 5 North Colonnade in 2021, I am pleased we have reached this agreement with CWG which delivers a long-term cost saving for the bank. Canary Wharf is a fantastic place to work and our 5-year lease extension at One Churchill Place is testament to that.’
Weaker UK office demand
Offices across the UK are generally experiencing weaker demand. According to Cluttons' "Winter 2023" report, there is currently more than 110 mln ft2 of vacant office space in the UK – the highest level in nearly a decade, and this will rise to 140 mln ft2 feet by 2025 according to CoStar.
In London, office leasing activity picked up in Q3, but even so, net absorption was still in negative territory as the volume of stock being delivered to the market outpaced a series of large lettings deals. The vacancy rate continues to climb and is now at a 20-year high of 9.2%, up from below 5% at the start of 2020.
Delivery levels are set to remain high, meaning the vacancy rate is unlikely to fall into 2024. But as with the UK market, there is a clear distinction between best-in-class office space in the capital, compared to poorer quality stock, reminded Cluttons.
Some 10.8 mln ft2 of office space was delivered in the 12 months to the end of September, up from 8.8 mln ft2 in the previous 12 months.
Law firm Kirkland & Ellis is taking 174,000 ft2 of option space at 40 Leadenhall underlining the attraction of the City, even as the vacancy rate is in low double digits.
The Corporation of London recently highlighted the potential for more tall towers in the city, underlining the confidence in this geography in spite of the headwinds.
Canary Wharf vacancy rates stand at 14% rising to 19% for the fringe areas taking into account the decision by HSBC to move west into the city.
Plenty of office space is being marketed by agents at Canary Wharf. CBRE, for example, is advertising space at 20 Churchill Place at £29.50 per ft2, 10 Upper Bank Street at £35 ft2, and 5 Canada Square at £42.5 ft2.
In the West End of London, a tighter supply of office space has kept the vacancy rate relatively low. In turn, areas with lower vacancy rates are seeing more upwards pressure on rents, but rental rises remain modest.
Flight to quality
The big trend is in occupiers requiring quality. Cluttons said in its report: 'There has never been such a divergence between prime and secondary office space before.’
Stated Cluttons: ‘This is still being driven by companies downsizing due to changing working patterns, as well the need to meet higher net-zero requirements, drawing demand to the best-in-class buildings in terms of ESG.’
