Meta-Curse?
#Week39 saw offices back in the headlines as lower occupier requirements continued to impact the market. Firstly, on Tuesday, British Land revealed that Meta had paid some £149 million to break its lease on the 310,000 sq ft (29,000 sq m) it had taken - but never occupied - at 1 Triton Square near Regent’s Park in London. The news was little better the day after, with leading analyst Mike Prew knocking as much as 45% off his share price forecasts for the major listed office landlords.
There’s a fair bit to unpack here, so let’s take each in turn. At first glance, the Meta deal looks to be the sort of agreement that landlords and occupiers come to all the time, with its scale and the Meta brand generating more attention than it would otherwise garner. However, it is hard to deny that it feels indicative of a corporate sector that requires less space than it used to.
The Facebook, Instagram and WhatsApp owner had been trying to sublet the building, and there are plenty of rumours about a potential deal having been lined up before being vetoed. Ultimately, Meta decided to cut its losses, and with the payment amounting to just 0.8% of its profit last year, it certainly has the cash to make the problem go away.
From British Land’s perspective, it is an opportunity to reposition towards life sciences while having a bit of breathing space on securing a new occupier. Time will tell if it can re-lease the building quickly enough, and at a high enough rent, to come out of the deal in the black. Meanwhile, office landlords will be hoping Meta’s surrender reflects its specific circumstances rather than the market as a whole.
Which brings us to Mike Prew’s research note. Its conclusions, if you own office space in central London, were quite sobering. “Retail was technology’s first casualty, we think offices are next,” he wrote, adding, “utilisation has shrunk and landlords are losing pricing power as tenants offload surplus space.” He thinks vacant space in central London is near a 30-year high, and expects rents to fall 5% next year in the West End and 15% in The City.
Tough times await, but if there was a chink of light in his analysis it was the continued strong demand for A* stock – buildings attracting what he terms “a green-ium” as corporate occupiers gravitate towards modern space with the strongest sustainability credentials. Anecdotally, there looks to be plenty of lettings activity for newer assets. If this ‘flight to quality’ has become an accepted truth in the market, it is still a good sign that someone with Prew’s insight can see the trend too.
He also made a comparison that will give office landlords some hope: the research likened the present market to the early 2000s, when the dotcom bust saw tech companies hand back space to their landlords. Anyone in the sector at that time will remember how difficult it was, but crucially it did eventually recover. Nothing lasts forever, particularly in a market as dynamic as Central London; if history teaches us anything, it is that new occupiers will ultimately be found. The uncertain outlook is already weighing heavily on development activity and it won’t take too long before lower completions translate into shortages in some sub-markets. Braver investors will already be eyeing up some potential bargains in anticipation of the next cycle.