Why flight to quality is splitting the office stock in half
A landlord in North London will tell you the office market has recovered. A tenant will tell you it has not. Both are looking at the same set of buildings and drawing entirely different conclusions, which is the most reliable sign that a market is in the middle of genuinely repricing rather than simply recovering.
The two tier building stock
There are now, broadly, two categories of office space in North London. There is the small number of recently refurbished, well specified buildings with genuine amenity, which are close to full and commanding rents close to pre pandemic peaks. And there is everything else, a much larger stock of older buildings that are struggling to fill even at substantially reduced rents.
This is sometimes called the flight to quality, and it is a real phenomenon, but the phrase understates how brutal the gap has become. It is not a spectrum. It is closer to two entirely separate markets sharing a postcode.
What this means for a landlord
Owning a well specified building right now is a good business. Owning an older, unrefurbished building is an expensive holding pattern, and a growing number of owners are quietly weighing the cost of refurbishment against the cost of conversion to residential, which requires planning permission that local authorities are, in places, becoming more willing to grant.
The hybrid working effect, properly measured
Every commentary on office demand mentions hybrid working. Fewer of them look closely at what it actually means for North London specifically, which has a lower concentration of large corporate occupiers than the City or Canary Wharf and a higher concentration of small and growing businesses.
Small businesses have generally been less able to sustain fully remote arrangements than large corporates, partly because collaboration and training are harder to do well remotely at a small scale, and partly because a shared office remains one of the few affordable ways to build company culture. This has kept demand for smaller, flexible units in North London more resilient than headline vacancy figures suggest.
The conversion question
Converting office space to residential sounds simple and rarely is. Floor plates designed for open plan working do not automatically produce good housing, and the councils granting permission are, in places, doing so under considerable pressure to meet housing targets that would otherwise be missed. Government planning guidance available through official channels sets the framework, but the actual decisions happen borough by borough and vary considerably.
The risk is straightforward: convert too much office stock too quickly and you remove exactly the kind of small, flexible, affordable space that North London’s founder economy depends on to get started. Nobody currently sitting on a planning committee is thinking about that trade off with the seriousness it deserves.
Who benefits from the current mess
Ironically, the businesses that benefit most from the current disorganised state of the office market are the smallest ones, who can now negotiate short flexible leases on older stock at rents that would have been unthinkable five years ago. A founder starting out today has more genuinely cheap options than at any point in the last two decades. It will not last.
What to watch next
The number that actually matters is not headline vacancy, which lumps good and bad stock together and tells you very little. It is take up of newly refurbished space against take up of unrefurbished space, tracked separately. When that gap starts narrowing, the market has genuinely turned. Until then, this is two markets wearing one name.
The insurance angle nobody prices in
Older office buildings carry a specific and growing risk that rarely appears in a headline rent figure, which is the rising cost and narrowing availability of buildings insurance for stock that has not been substantially upgraded. Insurers are increasingly pricing older commercial buildings on the basis of energy efficiency and structural condition, and a landlord sitting on unrefurbished stock is finding that the true cost of holding it includes a premium that did not exist five years ago.
This quietly accelerates the two tier split described above, because it adds a genuine financial pressure on top of the demand pressure, pushing more owners towards either refurbishment or conversion faster than tenant demand alone would have forced.
I will keep watching the borough planning committees, because that is where this actually gets decided, one grudging vote at a time.
The tenants who never appear in the data
Vacancy statistics measure signed leases, not activity. A meaningful amount of the smallest office and studio space in North London is occupied informally, sublet by an existing tenant to a freelancer or a two person team on terms that never reach a commercial agent’s books. This shadow occupancy is invisible to every headline figure and is arguably a better indicator of real demand than any published vacancy rate.
Landlords who have noticed this are increasingly building flexible subletting rights into their own leases, effectively formalising a market that was already happening quietly around them. It is a sensible response to a demand signal the official data cannot see.
More property and business analysis at Chelsea Bloom’s author page, The London Prat.
SOURCE: https://bohiney.com/