The Atrium is a black glass office tower glowering over the town centre of Uxbridge, 16 miles west of London. It symbolises a problem facing commercial property investors across the UK.
The 1990s building, which counts multi-level marketing company Herbalife among its remaining tenants, is now roughly half empty. The Atrium is not alone: a quarter of the office space in the commuter town near the M25 motorway sits vacant.
BlackRock bought the Atrium block from insurer Aviva in 2015 for £55mn. The US investment giant has been marketing the property recently for as little as £16mn, according to sales documents.
The marketing materials include studies on how to revamp the building as flats, but the project would be difficult given its vast scale.
“If it wasn’t a death star, it would have already been converted to residential,” said a real estate executive familiar with the local market, who said similar buildings faced an existential threat. “You can duck, dodge, dive and weave and you’re not going to get the space let. They can’t be repurposed for anything unless you raze them.”
BlackRock declined to comment.
The uncertain future demand for office space, given the popularity of hybrid working in the wake of the pandemic, has made workplaces the epicentre of anxiety about the wider commercial property market, which has been buffeted by rising interest rates. In the UK, older offices in peripheral locations are the most threatened.
Meanwhile, fears from prominent US investors have made asset managers and lenders anxious about office deals, and transactions have dried up.
“Most of the big private equity won’t touch offices,” said a London-based property debt adviser. “If you say ‘office’ to any investor from the US, they practically throw up on your shoes.”
More than 100mn sq ft of office space is now vacant across the UK, the highest in nine years, according to CoStar, which analyses commercial real estate. The amount of empty space has climbed steadily since Covid-19 struck, and is now 65 per cent higher than March 2020.
“The pace at which assets are becoming stranded assets is actually accelerating quite a lot,” said Raimondo Amabile, global chief investment officer at PGIM real estate. “We should not underestimate how fast this can go, since the office market has represented a big part of the investment market.”
The US office market has also been badly hit, with vacancy rates rising sharply in major cities like San Francisco and New York. Berkshire Hathaway vice-chair Charlie Munger warned last month of “agony” in the office market and the risk from bad property loans.
In major European and UK cities, workers have been quicker to return to the office. The market for office space has split between strong demand for top-end space and lacklustre interest in other buildings.
The vacancy rate in parts of London’s west end is as low as 3 per cent, with even less available space in high-end buildings with environmental certifications where tenants will sign leases several years in advance to secure space.
Grant Lonsdale, director of market analytics at CoStar, said companies were “vacating older and less energy-efficient buildings”. Two-thirds of the vacant space in the UK is in buildings that are more than 20 years old, according to CoStar.
Some large, older office buildings are also almost impossible to repurpose because their vast floors are hard to divide into flats. Their values have already plunged, and will probably have to fall further before developers will be able to turn a profit by buying the buildings, knocking them down and reusing the land for flats or warehouses.
While city centres remain relatively popular, further-out locations such as Uxbridge — which sits at the end of London’s Metropolitan and Piccadilly underground lines — are struggling. But there are big variations, even in desirable areas, depending on the specific location, age and quality of the building.
Last week, wealth manager St James’s Place’s property fund, managed by Orchard Street, sold an ageing art deco block in London’s Soho to Great Portland Estate for £39mn, 30 per cent less than it paid to buy the property in 2018. Orchard Street and SJP declined to comment, but a person with knowledge of the deal said the building was sold for more than its most recent valuation.
Many institutional investors, including asset managers who own large regional office portfolios, have been looking to reduce their stock of offices. Selling pressure has increased since the autumn “mini-budget”, which set off a flood of investors pulling money from property funds, forcing funds run by M&G, Schroders and others to restrict redemptions.
BlackRock’s UK property fund, which owns the Atrium in Uxbridge, was among those frozen last year. The fund started partially repaying investors last month. A person with knowledge of the matter said the fund already owned fewer offices that its peers.
Asset managers looking to get rid of unloved office buildings have limited options to sell. “The market isn’t there to buy those assets. A desire to reweight portfolios is different from an ability to do so,” said Bill Page, head of real estate markets research at LGIM.
Still, a few investors are seeing opportunities in the bleak office market. Mark Harrison, chief executive of Praxis, said his company had spent more than £400mn on buying offices and plans to expand the purchases to £1bn. By buying the properties cheaply, Praxis could afford to improve them and still offer lower rents, he said.
“Markets generally overreact and they certainly have when it comes to offices,” said Harrison. “The distressed sellers of this kind of real estate have bought into a negative feedback loop.”
Older offices face another headwind from new environmental standards, brought in to help reduce the 39 per cent of energy-related carbon emission that comes from buildings and help the UK meet its net zero targets.
In some UK cities, including Northampton, Huddersfield and Leicester, a fifth or more of the office stock is currently below the minimum green standards, according to analysis by the Centre for Cities. The think-tank warned the policy could lead to a large number of “stranded assets”, including offices as well as shops, especially in northern towns and cities.
Valentine Quinio, senior analyst at the Centre for Cities, said: “The risk essentially is that there will be a number of places where these properties become stranded assets because they are unable to be let out in their current condition, but they also can’t secure a rent that is high enough to make the investment worth it.”