(BLOOMBERG) - When the Gherkin tower opened 17 years ago, its skyline-defining silhouette heralded a new era in the low-rise City of London. Now, a spate of new planned skyscrapers threaten to erase it from view and from relevance.
As one of the Gherkin's main residents weighs a move, even iconic buildings risk struggling to keep or replace tenants in London's premier financial district. While the pandemic is emptying city offices at the fastest pace in more than a decade, it hasn't slowed the coming wave of towers. That carries a warning for landlords: if there is a return to the office, it won't be to drab buildings that feature only endless rows of desks.
In a financial hub that draws more international capital than any other, the fate of the older buildings could hit the fortunes of some of the world's biggest real-estate investors, from China Investment Corp to Norway's sovereign wealth fund and Malaysia's biggest pension fund.
"Would I buy an existing investment property in the City of London today? Probably not," says Mr John Ritblat, the octogenarian former chairman and chief executive officer who built British Land into one of London's biggest landlords over nearly four decades. But if "you can build on cost, on time and let a new office appropriately, that is still a very good bet". Several developers are taking that bet.
Three skyscrapers are being built within 100 metres of the Gherkin, with the same number approved nearby, some of the 18 major towers at various stages of the planning process in the City. One of the Gherkin's biggest tenants, law firm Kirkland & Ellis, may move to one of the new buildings.
The Gherkin, owned by the family of late billionaire Joseph Safra, was one of four City buildings higher than St Paul's Cathedral when it was finished - that number could leap closer to 40 this decade.
The Gherkin's "advanced design continues to be the benchmark by which others are measured", said a spokesman for J. Safra Group. "The tenants enjoy these benefits and remain committed to long-term growth within the building."
Sceptics are still forecasting a far different era for the City and rival financial district Canary Wharf, after banks that were already offloading space accelerated their downsizing and wealthier employees fled to the country with dreams that working remotely might just last forever.
As firms entice workers back with promises of more flexibility, developers are betting on top rents for the best new buildings as tenants pay more for offices that suit their post-pandemic needs. There aren't many in London that currently tick that box, and a recent lull in construction means those brave enough to start now should have even less competition when their projects complete in a few years' time.
The challenge for owners is that the pandemic has accelerated the pace at which buildings have become obsolete, according to Savills chief executive officer Mark Ridley. That's because potential customers want the most up-to-date air conditioning, elevators and space that can adapt to the more flexible demands of a post-covid world, where the role of the office refocuses on collaboration and innovation. Less carpet and fewer cubicles, more communal areas and break-out rooms.
"In the short term, I think there are quite a lot of pretty awful office buildings that will struggle because they just don't fit the modern agenda," said Mr Nick Leslau, a real-estate investor who made money from buying London offices cheaply after the financial crisis and then selling out to Blackstone Group. "There will be pressure on rents because it is inconceivable that there will not be companies walking away from large spaces." The shift is well under way.
City office vacancies have soared about 70 per cent during the pandemic to more than 12 million square feet, according to Savills, as the coronavirus spurred employers to rethink their real-estate needs. That's the equivalent of two-dozen empty Gherkins.
The pressure on older buildings has also coincided with the halt to the expansion of WeWork, once an obvious saviour for landlords with big empty buildings as it hoovered up millions of square feet of vacant space. The flexible office firm's refocus on turning a profit had prompted it to pull out of several deals for new London buildings including Peterborough Court, the former Goldman Sachs office.
All four of the former Goldman blocks are owned by the kinds of overseas investors that came to dominate the City office market in the decade following the financial crisis, accounting for most of the roughly US$13 billion poured into the district's real estate each year. The ever-present tenant base sourced from the half-a-million workers that filled the district daily provided steady rental income and few headaches.
"Offices have been a great place for institutions to park money in the middle of the central business district; it is very passive, you don't have to do much, you just collect the rent and re-do the lobby every five years," Centersquare Investment Management's chief investment strategist Scott Crowe said. "The game has changed. Like the rest of real estate, it requires more capital, more understanding of tenants, more technology."