London Mayor Sadiq Khan’s plans for an ambitious pedestrianisation makeover for Oxford Street has divided opinion.
Commercial real estate occupancy levels continue to struggle to bounce back from the pandemic, which combined with the high-interest rate environment is placing thesector under pressure. Yet despite all this, Oxford Street tells a more nuanced story than the bleak portrait often painted – and it’s one that London’s real estate market could learn from.
The real estate sectors dominating the West End, office and retail, have faced a tough road to recovery. Love it or hate it, remote working has permanently altered the traditional office setup and impacted occupancy rates in what were once some of the most prestigious buildings in London; while tourism – which brought in over £15 billion in 2019 – is only now returning to pre-pandemic levels.
Adding to this is what the industry has come to know as the ‘debt maturity wall’. The high volume of loans issued during a period of historically low interest rates are now starting to come due. With today’s higher rates, refinancing has become a serious challenge for commercial landlords and developers, especially as traditional banks become more cautious.In some cases, owners have to look at alternative lenders with higher interest rates and more stringent terms – at a time when tenant demand has dwindled.
But Oxford Street is an example of an investment-friendly microclimate that should prompt a rethink of these conceptions.
Despite the changing needs of businesses, high quality office space in the West End is still in high demand. Vacancy rates for newly built offices in this area are remarkably low, standing at just 1.5 per cent. Canary Wharf, on the other hand, is grappling with an anticipated vacancy rate of 16.6 per cent this year (with a threat that this is to increase further in 2025), despite the former perception as a powerhouse of London's office market.
Retail also appears to be finding its footing slowly. Loss of footfall during the pandemic compounded the growing threat of online shopping, and many brick-and-mortar brands had to evolve or die. Yet retail property valuations in the West End have now stabilised – and the success is largely down to omnichannel retailing, blending physical stores with online platforms.
Businesses that managed to adapt are now starting to see the benefits, and a flourishing retail sector holds a lot of sway over office real estate, as desirable areas and amenities entice employees back to physical workspaces, creating a self-sustaining cycle for the two real estate sectors.
For the right investor, the rewards of change can be enormous. After all, offices have long been considered an asset and play a major role in talent retention. Firms that pivoted early to modernise their offices are best positioned for success in a hybrid work environment. Many leading businesses are now calling for a return to in-person work. While older, expensive office buildings can struggle to remain competitive, a focus on refurbishment and adaptive reuse can spell high returns.
Commercial developers are also considering how to move office assets to mixed-use or residential real estate as a long-term investment – and one that could bring continual rewards. Diversifying portfolios to include residential rental units, retail, or public spaces alongside office buildings can spread the risk and invest in a wider community. Those who can successfully navigate the complexities of refurbishing office buildings—balancing costs, technology upgrades, and carbon emissions—will have a clear edge in a competitive market.
Revitalising our real estate markets is certainly not without challenge. Investors must navigate the shifting complexities of the market, from the evolving demands on technology to increased regulatory requirements, and specialised fund administrators are already seeing an uptick in demand for these services. Yet the proposed pedestrianisation holds a clear lesson for London’s office market: regeneration, adaptability, and a willingness to embrace change can potentially bring significant reward.
Tamas Mark is Global Head of Real Assets at IQ-EQ
