Before the November lockdown in England, things were looking up for Canary Wharf. Up to a fifth of the 120,000 employees who work in the east London office district were travelling in each day, propping up local food and retail businesses and stoking optimism about a steady return to work.
But this week — after the announcement of the third stay at home order of the Covid-19 pandemic — the area was desolate once again.
More than anywhere else in the capital, the fortunes of the district hinge on the fate of the office. Developed in the 1990s as a cheaper extension of the City of London, it is defined by high-rise office buildings and little else.
As coronavirus threatens to permanently loosen employees’ bonds with their workplace, Canary Wharf is facing a critical test.
Shobi Khan, chief executive of Canary Wharf Group, which owns much of the broader estate, said his aspiration was to make the area a “24/7 city where people live, work and play”. But he acknowledged “it’s early days still, and the perception of Canary Wharf is that we’re just purely a financial district”.
Financial services companies make up just over half of CWG’s tenant base, but Mr Khan anticipates that share falling. The landlord is targeting technology companies and is looking to create a cluster of life sciences businesses locally.
CWG is also building thousands of new flats locally. The apartments, along with the 2022 completion of Crossrail — a long-delayed train line that will shorten the journey time from Canary Wharf to central London — form the basis of the 24/7 community Mr Khan envisages.
But remoulding Canary Wharf into a vibrant mixed-use community is a huge challenge. “It might be a completely different place in how it is perceived, but that’s in 20 years’ time, not two or three,” said a former board member of Songbird Estates, which preceded CWG as owner of the estate.
In the meantime, there is likely to be more pain for the company, which has been owned by US private equity firm Brookfield Property Partners and the Qatar Investment Authority since 2015. “It’s been a brutal market for 2020 and I think that will continue into 2021,” said Mr Khan.
Leasing activity in Canary Wharf in the first nine months of 2020 was at 40 per cent of the 10-year average, according to DeVono Cresa, which advises office tenants, and many companies are considering downsizing.
“Every occupier of scale will have fat in their portfolio . . . A quarter of large occupiers’ space is probably ‘at risk’, although I don’t think it will be more than that,” said Chris Lewis, a director at DeVono Cresa.
For decades, Canary Wharf’s skyscrapers have been anchored by large international banks that were drawn by the large spaces available for lower cost.
“The West End was more expensive than Holborn, and then there was the City, then Docklands, which was half the price. People who wanted high-quality space but were focused on the costs would go to Canary Wharf, even if they didn’t want to be in Canary Wharf,” said the former board member of Songbird Estates.
A number are now expected to cut back their space when leases expire. According to CWG’s accounts, a fifth of the landlord’s office leases will come to an end in the next five years. The average lease term across the portfolio was nine years as of September 2020.
JPMorgan, Barclays and Morgan Stanley, three of CWG largest tenants, have raised the prospect of more staff working remotely. This week, analysts at Morgan Stanley downgraded a number of London-listed office landlords and said the trend towards homeworking would reduce demand for space.
Remote working will not do away with the office but demand from occupiers is likely to drop by “10-15 per cent”, estimated Mr Khan.
And with vast floor plates less fashionable than they were in the 1990s, it is not clear who would fill the space.
“If we were designing our buildings now we wouldn’t make them so massive and dense: 1m sq ft buildings with 30,000 sq ft per floor have been increasingly difficult to let in the last few years,” said one employee of CWG.
The company is building more modern offices at Wood Wharf, a 23-acre development site that will test Mr Khan’s vision of the mixed-use estate. The first residential towers are already complete, but sales have been delayed by coronavirus.
The company has also stalled the development of new offices at the site. “We’ve paused because we don’t have sufficient confidence that an occupier will be there . . . that market is dead at the moment, and it’s a slightly untested location,” the employee admitted.
However he is confident that companies will start leasing space once the Covid-19 vaccine has been rolled out, and once the shape of the UK’s future relationship with the EU becomes clearer.
Fears that the EU referendum in 2016 would cause the area to haemorrhage staff to Europe have not yet been realised, with very limited attrition of tenants so far.
Average rents for the best offices locally have held steady since late 2019, at £52.50 per square foot, while rents for lower quality workspace dipped 7 per cent over 2020 to £35 per sq ft, according to DeVono Cresa.
“The perception of Canary Wharf being this very clinical, clean and tidy place, is actually coming back to our favour,” said Richard Archer, managing director of offices at CWG.
But with another lengthy lockdown and the potential for longer-term changes to patterns of work, others are less sanguine. “They have great big corporate tenants looking to downsize and all these massive towers. I think Canary Wharf will be reinvented because it has to be,” said one leading office agent.
The district is still cheaper than central London, but the rent gap has closed, and, as new office hubs have sprung up in King’s Cross, Farringdon and Stratford, securing new tenants could become harder.
“Canary Wharf’s ability to attract based on price is much harder now,” said the former Songbird board member. “So how do they take themselves from a place where people went for value, to a place where people actually want to work?”