For any office market, employment is a key indicator, as it dictates the size of demand. That makes the release of the latest employment statistics for London of interest to those of us who analyse the capital’s office market. The figures from the Office for National Statistics (ONS) make surprising reading, and suggest the market could soon see a rise in tenant release space.
The ONS data confirms that the Covid downturn has had a worse impact on London’s jobs market than the 2008-2009 Global Financial Crisis (GFC). The capital lost, peak to trough, around 219,000 jobs during the GFC. Between March and September of 2020, around 229,000 jobs were cut in the London area, and that figure will grow higher.
Just over half of the jobs lost were in industries that conduct most of their operations from business premises other than offices, such as the retail sector and hospitality. Yet, as we will discuss below, industries that are office occupying have axed large numbers of jobs. As a result, it is likely that some office tenants in London are holding significant volumes of ‘grey’ space.
The industry sector in London which has seen the greatest number of jobs lost is what the ONS describes as ‘Professional, Scientific and Technical Activities’. This has shed over 47,000 posts since March 2020, a fall of 5.7%. That could suggest we will see less tenant demand in locations popular with the professions and business services providers, such as Midtown and Southbank. However, we should remember that under the heading ‘technical activities’ there are various small industries that inflate the figures – it would be a mistake to assume the 47,000 job losses are predominately lawyers and accountants.
Now the big surprise. Financial sector job numbers remained steady in the six months to September 2020, at 402,000. Previous London office market downturns witnessed sharp increases in availability in the City and Canary Wharf as a result of large scale redundancies in finance. Because of Brexit and the tighter regulatory controls applied to finance post-GFC, it is possible that many City institutions already moved into this downturn with their headcount fully reviewed. Therefore, firms may feel there is not much ‘fat’ left to be trimmed. This will be interesting from a property market perspective, as it may mean places like the City Core and Canary Wharf, which were hard hit in previous downswings, fare better this time around.
However, the financial sector does face other challenges that could bring the job figures under pressure in the future. Data on financial trading for a number of Euro-denominated securities has pointed to a drift from London to Amsterdam since the UK left the Single Market at the start of this year. We have in the past had many false alarms on a large Brexit jobs exodus; but it feels too early to completely dismiss this as a threat. It should though be remembered that the number of roles moving to the continent due to Brexit has consistently come in far below forecasts.
So, what about the Tech firms? The Information & Communication sector has shed 34,000 jobs, a fall of 6.6%. To set this in context, the Tech sector has grown by nearly 40% over the last decade, so a retrenchment after such an impressive bull run is unsurprising. There is certainly no reason to doubt the sector’s long-term prospects. However, the above figures do add to concerns over demand for desks in coworking centres. This could also point to soft rents in the near-term for tech-centric districts of London.
Moreover, thought needs to be given as to whether the last year may have seen population change in the capital that could have office market implications. The Economic Statistics Centre of Excellence (ESCE) recently produced estimates suggesting the foreign-born population of London has fallen by 700,000 since the pandemic began. ESCE acknowledge that the figure includes many hospitality workers, students and dependents. Nevertheless, some office workers will have left.
There is also the question: might we also see some Londoners decide to move post-pandemic out of the city, attracted by lower property prices on larger homes?
Overall, the latest employment figures point to supply pressures to come for the London office market. The volume of job losses has been remarkably high, and coincided with the discovery by many firms that home working is proving to be more successful than previously assumed. It is logical that when the return to the office happens, many firms will review their occupation with a view to reduction.
Later this year, and early in 2022, the market needs to be ready for the possibility of a significant release of sub-let space. Rents may have to adjust accordingly, and perhaps on a headline level – not just net effective.
The vacancy rates we read in research reports give us a minimum figure, that would rise higher if the grey space were incorporated.