In central London, a big bet is being placed on a return to the office

On a recent Monday afternoon, visitors emerging from the tranquility of St. Paul’s Cathedral in the heart of London could walk just a few steps north before they were hit by an explosion of sound: the almost deafening sound of a giant hydraulic drill . A few steps away, sparks flew from another construction site.

The City of London, Britain’s historic financial district, is being swamped with construction work, the intensity of which is not expected to slow down anytime soon.

The City of London Corporation, the borough’s governing body, has approved ten new office towers, including one that will exceed the height of any other in the area, known locally as the Square Mile. In total, more than five million square feet of office space is under construction, with another five million square feet in the pipeline.

The plans, which will transform the district’s skyline, represent a huge bet on the future of the workplace after two major shocks to the commercial real estate sector: the Brexit referendum, which sputtered development plans, and the pandemic lockdowns that hit the city’s streets have left. .

According to research by real estate services provider JLL, the vacancy rate for offices in the municipality was 9.5 percent in the third quarter of this year, significantly higher than the long-term average of 5.7 percent. But for new construction, the vacancy rate was only 1.4 percent.

Developers are facing a “beneficial environment” despite economic challenges such as inflation and high interest rates, says Chris Valentine, head of central London office at JLL.

“Much of the existing development pipeline in the City of London is already pre-let, under offer or under negotiation,” Mr Valentine said. He added that demand for best in class offices, with green features and the latest amenities, would continue in the second half of this decade.

The City of London Corporation is basing its growth estimates on a report it commissioned showing that an expected large increase in the number of jobs in the borough would support demand for office space, regardless of whether hybrid working remains the norm.

“There is still room to do more,” said Shravan Joshi, chairman of the company’s planning and transportation committee. By 2040, the City of London will need 13 million square meters of additional office space, he added.

Despite the optimism, there are risks. Construction could lead to a glut of older office buildings that businesses will abandon. And there is always the threat of businesses being drawn to other business districts, including Canary Wharf, two miles to the east.

Before the pandemic, about 540,000 workers commuted to the city. Now the district is home to more jobs — about 617,000 — but fewer people are going to the office. The number of people entering and leaving London’s Square Mile tube stations is on average around three-quarters of pre-pandemic levels.

The City of London Corporation is trying to lure workers and visitors back. This summer, the company launched a website to promote the city’s art galleries, historic sites and other attractions. Although the neighborhood is still heavily occupied by financial and professional services companies, the new buildings are designed to attract small and medium-sized tenants, especially technology companies.

Officials are also encouraging developers to make space in the towers available to the public, inspired by the success of the Sky Garden at the top of the neighborhood’s “Walkie-Talkie” building. Another building, the tallest in the city, opened last year with a viewing gallery on the 58th floor called Horizon 22, and one has also opened at the top of the new adjacent tower.

Demand for sustainability is high and four-fifths of the district’s buildings already meet the highest standards, Mr Joshi said. Older buildings are struggling with occupancy levels and in response the company is relaxing the rules to convert them into locations for culture, higher education or catering.

Still, the overall focus is clear. “Our basic policy is that the office comes first,” Mr Joshi said.

That view was seemingly confirmed this summer with the news that HSBC would move its headquarters back to the Square Mile, more than two decades after the bank was lured to Canary Wharf. About six months earlier, law firm Clifford Chance had also said it would move to the city from Canary Wharf.

“These traditional businesses from the city, such as legal and banking, are looking back to the Square Mile as their cultural home, their heritage home, where they first started,” Mr Joshi said.

After more than three centuries as Britain’s financial center, from the 1990s the City of London struggled to compete with Canary Wharf, former docklands that were redeveloped for high-rise buildings that could provide much more space for banks and their trading floors . Expansion on the Square Mile was thwarted due to its proximity to St. Paul’s and other historic buildings.

In Canary Wharf’s early years, many companies were reluctant to move there, and the project almost failed during a recession and the 1992 bankruptcy of Olympia & York, the company behind the development. But better public transport connections were created, and companies followed suit.

In the early 2000s, Canary Wharf was vibrant, says Lucy Newton, professor of business history at the University of Reading’s Henley Business School. “It took a while to get off the ground, but it had the support of financial institutions who felt they had outgrown the city,” she said.

Three decades later, the tables have turned. Successive London mayors have relaxed the Square Mile’s planning rules and towers have sprung up. There are still rules protecting views of St. Paul’s and the Tower of London, and Mayor Sadiq Khan has directed the district to limit towers to certain areas, but density will increase.

“You can’t build out because you’re a square mile, so all you can really do is build up,” said Chris Hayward, the company’s policy chairman and Mr. Joshi’s predecessor at the helm of the planning commission. In the three years he led that committee, “we built more tall buildings on the Square Mile than ever in the history of the Square Mile,” he added.

Just five months ago, the City of London Corporation approved a 63-storey tower with 800,000 square meters of office space and space on the upper floors for public events. Schroders Capital, the investment manager behind the project, described it as “a clear long-term commitment to the City of London.”

To boost its growth prospects, the city is trying to shake its image as a stuffy business district by enticing more people to spend time there in the evenings and on weekends.

The Square Mile has a population of around 9,000, and officials are enticing visitors with more leisure activities and well-known restaurants such as the Wolseley, and highlighting its cultural attractions, including a new home for the Museum of London.

“We have never considered ourselves a residential town,” Mr. Hayward said. “The housing development around the city actually hinders the business growth, that commercial growth, that we want.”

De Wolseley hopes to be part of that growth. For the second location, the luxury restaurant chose a spot on the north side of London Bridge, a gateway to the city. The company is also betting on a stronger return to the office and for more tourists and residents to support the restaurant, which is two-thirds larger than the original.

“I think ultimately a majority of people will return to their offices Monday through Friday,” said Baton Berisha, CEO of Wolseley Hospitality Group.

Kate Hart, the CEO of the Business Improvement District where most of the towers are clustered, works with companies in the region, which has about 80,000 employees. Her area still suffers from empty shop fronts, including Leadenhall Market, a listed building.

“There is a real push to get people back to the office,” Ms Hart said. But they need to see a benefit to commuting, she said, adding: “You can’t have that vibrancy if you don’t have that workforce back.”

Even though more and more planning applications are coming in, not everyone is at the forefront. The developers of 1 Undershaft, the building that would become the tallest building, sent their architects back to the drawing board this year to adjust the design, seven years after the tower was approved.

And Landsec, one of Britain’s largest commercial property companies, with more than £10 billion in property assets, is diverging from the City of London. In the past three years it has sold office properties worth £2.2 billion across London, almost all in the City, halving the company’s assets there.

Landsec is moving to the West End and an area near Waterloo, London’s busiest train station. Those neighborhoods have “a large number of bars and restaurants and the kind of mixed character that makes it attractive to a much broader group of people than just people who come to an office to do some work,” said Remco Simon, head of the neighborhood. strategy and investment officer at Landsec.

But Landsec is not abandoning the city. The company owns One New Change, one of the largest retail spaces in the district. The mall has suffered from the departure of major brands, and most of the lower floor stores are empty. Landsec has reversed some of the downward momentum by building a Formula 1 venue, and its rooftop restaurant overlooking St. Paul’s Cathedral remains popular.

And it’s still open to the potential of some office space there. Last month, Landsec was given permission to demolish a building it bought in late 2020 and replace it with a 23-storey tower with office and retail space. That said, “we have not committed to building the building,” Mr. Simon said.