London office vacancies surge as company moves leave big holes in older properties

A file photo of  buildings under development at  Canary Wharf in east London.
A file photo of buildings under development at Canary Wharf in east London. PHOTO: AFP

LONDON (BLOOMBERG) - Modern office buildings are all the rage in central London, with a swath of companies including UBS Group moving into new premises in the last 12 months. The problem for landlords is finding someone to replace them.

A growing amount of unoccupied older properties caused the overall office vacancy rate to climb to 5.8 per cent at the end of the first quarter from 3.9 per cent a year earlier, according to data compiled by Deloitte. That was the biggest increase since 2009.

"The demand for new space is still there; the demand for second-hand space isn't necessarily as hot," said Mr Shaun Dawson, a research manager at the firm.

Investors pulled back from London real estate immediately after last year's Brexit vote, fearing that the UK's departure from the European Union would cause a collapse in demand for office space. While high-profile lease agreements by companies including Apple and Deutsche Bank have helped ease concerns since the June 23 vote, the latest data from Deloitte show there are limits to the market's recovery.

The amount of office space available to rent climbed 36 per cent in 2016 and by a further 19 per cent in the first quarter, Deloitte said in a report published on Wednesday (May 17). That's almost entirely made up of space that has become available as a result of companies downsizing or moving offices, the data show.

UBS, for example, completed a large office move last year, vacating several older buildings in favour of a single new London headquarters.

The amount of office space under construction in central London fell 6 per cent to 13.1 million squ ft (1.2 million sq m) in the six months through March, the first drop recorded by the biannual survey since September 2014. That was after developers completed 3.9 million sq ft of new office space in the period, the most Deloitte has recorded since 2004.

"We have started to see developers hold off," Mr Dawson said, citing increasing construction costs and weaker demand because of political uncertainty. "We are feeling that post-Brexit blip."