Nuveen And Schroders Say There’s Life Beyond Best-Of-The-Best Offices

A mantra has taken hold in the real estate world in the last year or so when it comes to office real estate: New, best-in-class buildings in central locations with swanky amenities will see rents grow and values stay robust. Own anything else, and you’re in trouble. 

That might be about to change.

“The economic rent in London right now to deliver a tall building is £110 a foot. Not many people want to pay 110 quid, or even have the ability to,” Nuveen Head of Offices Europe Nick Deacon said at Bisnow’s Adapting To A New Era Of Workspaces event, held at Lendlease’s Turing Building in Stratford.  

“I think a discounted, low-carbon, low-tech offering in Grade A-minus or Grade B buildings, that's probably the big theme for the next two to three years.”

When negotiating with tenants for the past few years, Deacon said rent affordability has been less of a factor than matters like environmental, social and corporate governance credentials and amenities. Occupiers still want those things, but prime rents have now risen to a level that puts affordability back on the agenda.

That presents an opportunity for owners of buildings in the next tier down to pick up some of the demand. 

Some buildings are no longer fit for purpose, and for tertiary buildings in tertiary locations, “we’re three years into a decade of value destruction,” Deacon said.

But data highlights how Grade-B rents have remained relatively resilient due to the lack of new-build supply coming through. Grade-B rents in Mayfair are £70 to £102 per SF and £65 to £75 per SF in the City, according to numbers from fit-out specialist Oktra. Until recently, the top end of those brackets would have been considered a prime rent for those markets. 

Pick the right location in London, and the demand for space, be it office or alternative uses, will allow a building to find a tenant, the event heard. That's provided the valuation is right. 

“A little bit of context is required because if you own central London offices, depending on your definition of central London, you're not really the secondary market,” Schroders Capital Head of Central London & Strategic Partnerships Makoto Fukui said. 

“Central London, you have the attraction of being where companies want to be for various reasons. But even at the lowest value, you're at a level where you can spend money on buildings and make it stack up for a range of occupiers, whether it's £100-plus for city core prime to £60 for secondary in central London assets.”

Fukui said that if assets are no longer able to find office tenants in central London, the opportunity exists for conversion to residential. He cited the example of Jubilee House, an office that the investor bought in Stratford before converting it to student accommodation and selling it to Unite for £74M in 2023. 

“One of our best investments in the last cycle was to convert an office building to do student accommodation,” he said. “The residual value of that was was easily above existing-use value.”