As the UK waits with bated breath to learn who will be its next leader on 5 September, global real estate adviser Cushman & Wakefield has compiled research spanning decades to predict how London office rents will be affected by a change of the guard.
Cushman & Wakefield’s rental records began in the second quarter of 1977, and at that point in time, the City of London recorded prime office rents of £12.50 per square foot. By the end of the Thatcher era in 1990, these rents stood at £57.50 having peaked at £65 per square foot in late 1988.
John Major adopted an already troubled economy which fell into recession in 1991 after an economic boom in the late 1980s. Major retained office until mid-1997 having won the 1992 election, and during this period rents increased from £40 to £42.50 per square foot. However this increase masks the time in between, when rental values dropped to a low of £31.25 per square foot before rising in 1994.
The shift in power in 1997 saw Tony Blair inherit an already recovering economy. At the start of his government, rents were at £42.50 per square foot, peaking in 2001 at £63.75, broadly in line with levels that were seen at the end of the Thatcher era.
Unlike Thatcher, however, Blair rode out a recession during his time in office which lasted from 2001 until 2004 when City Core rents dropped to a low of £45 per square foot, reflecting a 29% fall in headline rental values. Blair, however, won the 2005 election retaining a Labour majority, and during his second term, he was able to see out the economic recovery. Blair spent 10 years in office, and during that time, rents rose by 50%. In mid-2007, he handed over power to Gordon Brown just as the market was preparing for yet another downturn.
At the start of Brown’s term, rental values in the City peaked to £65 per square foot at the end of 2007 – the highest recorded rents at the time – but the global financial crisis put a stop to this. Within a quarter, the rent fell by 6% to £61 per square foot and further declined to reach its lowest point in the third quarter of 2009 at £42.50 per square foot, falling by 35% from peak to trough. By the time Brown left office in May 2010 by way of election, rental values were already beginning to tick up.
Following his departure, power shifted once again back to the Conservatives when the UK was still firmly in recession. However, a hung parliament and a forced coalition government with the Liberal Democrat’s meant that the Tories didn't necessarily seal the deal and rents plateaued between Q1 2011 through to Q3 2013 at £55 per square foot.
At this point, and as the UK headed out of recession with positive-but-subdued GDP growth, City rents began to improve once again. By mid-2015, the Tories secured a Commons majority and rents continued to climb until 2016 when Central London real estate experienced a bumper year with office rents reaching £70 per square foot.
After the disaster for David Cameron that was the Brexit referendum, his resignation paved way for Theresa May to assume responsibility. With uncertainty surrounding the result and what it meant for the the UK, office rents dipped marginally. To stabilise both the government and the economy, May called a snap election in April 2017. This, however, did not initially secure rents as they subsequently fell in the latter half of 2017 to £67.50, from the election level of £68.50 per square foot.
Rents did not rise under May until the final quarter preceding her resignation; they remained at £67.50 per square foot for seven consecutive quarters before rising marginally to £68 per square foot in Q2 2019. May's uncertain and troubled time in office came to an end soon after when she tended her resignation and Boris Johnson followed as her successor.
Rents rose immediately, by 2% over his first quarter as PM, to £68 per square foot. Johnson followed suit in calling a snap election to stabilise his government in the fourth quarter of 2019, which was a relative success. At this point, rents once again peaked at £70 per square foot at the end of 2019, although this was the direction of travel from the time at which he took office.
City office rental growth was in a relatively strong position at this point, and had the pandemic not hindered growth throughout most of 2020 and the first half of 2021, there could be an argument that rents were likely to continue rising under Johnson’s Tory majority. Nevertheless, this was not the case and during this period, rents reached a low of £65 per square foot, a level not seen since 2015 when Cameron was prime minister.
The current state of the post-pandemic recovery indicates that rents have steadied back to 2019 levels, and after a strong first half of 2022, when leasing activity was particularly strong across Central London, City office rents increased to £72.50 per square foot, the highest recorded headline rent since Cushman & Wakefield's records began.
The precarious state of the government, due to ongoing scandal, could hinder further growth. Office rents either stagnate or dip after a change of hands mid-term, while elections appear to increase confidence in the market and lead to an increase in prime office rental values.
Johnson had the choice to call a snap election to once again stabilise his majority in government and also steady the wavering economy. But took the option of resigning and handing over power to one of his peers, and City office rental value uncertainty tends to follow these resignations. However, with a two-month resignation period and a longer leadership race, this might not be the case.
The trends suggest when resignation occurs and power is handed over, the new PM takes on an uncertain marketplace: one that is either deteriorating or destined for downturn. This is evident in the case of Major, Brown and May. Boris Johnson is the exception to this trend, having taken on a market in 2019 that was already beginning to climb back to the record levels seen in 2016. The pandemic inevitably and inescapably created a barrier to further growth of office rents.
Johnson will hand over the reins on 5 September, but not before seeing rental growth of 6.6% during his tumultuous three-year premiership, and being in office when City office rents reached a record £72.50 per square foot at the end of the second quarter 2022.
So what's next for prime City rents? It’s no secret we are in for an uncertain 12-18 months and all eyes will be on the next PM as the UK continues to ride the wave of multiple headwinds facing its economy, which will in turn impact London’s office market. Is the Boris boost in rental values sustainable, or are we in for a Major correction?