In Central London, a Big Bet on a Return to the Office

On a recent Monday afternoon, visitors emerging from the serenity of St. Paul’s Cathedral in the heart of London could walk just a few steps north before being hit by a blast of noise: the near-deafening sounds of a giant hydraulic drill. A few steps farther, sparks flew overhead from another building site.

The City of London, Britain’s historic financial district, is awash with construction, the intensity of which is not expected to let up soon.

The City of London Corporation, the district’s governing body, has approved 10 new office towers, including one that will exceed the height of all others in the area, known locally as the Square Mile. Altogether, more than five million square feet of office space is under construction, with another five million square feet in the pipeline.

The plans, which will transform the district’s skyline, are a huge bet on the future of the workplace after two major shocks to the commercial real estate sector: the Brexit referendum, which sputtered development plans, and the pandemic lockdowns that left the city’s streets deserted.

The City’s office vacancy rate was 9.5 percent in the third quarter of this year, according to research from the real estate services firm JLL, notably higher than the long-term average of 5.7 percent. But for new builds, the vacancy rate was just 1.4 percent.

Developers face a “favorable environment” despite economic challenges like inflation and high interest rates, said Chris Valentine, the head of the central London office agency at JLL.

“Much of the existing development pipeline in the City of London is already pre-let, under offer or in negotiation,” Mr. Valentine said. He added that demand for “best in class” offices, with green credentials and the latest amenities, would continue into the second half of this decade.

The City of London Corporation is basing its growth estimates on a report it commissioned that found that an expected large increase in jobs in the district would support demand for office space regardless of whether hybrid work remained the norm.

“There’s still capacity for more to be done,” said Shravan Joshi, the chairman of the corporation’s planning and transportation committee. By 2040, the City of London will need 13 million square feet of additional office space, he added.

Despite the optimism, there are risks. The construction could lead to a glut of the older office buildings that companies will vacate. And there is always the threat that corporations will be drawn to other business districts, including Canary Wharf, two miles east.

Before the pandemic, about 540,000 workers commuted to the City. Now more jobs are based in the district — about 617,000 — but fewer people go into the office. The number of people entering and exiting London Underground stations in the Square Mile is, on average, about three-quarters of prepandemic levels.

The City of London Corporation is trying to entice workers and visitors back. This summer, the corporation started a website to promote the City’s art galleries, historical sites and other attractions. Though the district is still widely occupied by financial and professional services companies, new buildings are designed to attract small and midsize tenants, particularly technology firms.

Officials are also encouraging developers to make space in the towers available for the public, inspired by the success of the Sky Garden at the top of the district’s “Walkie-Talkie” building. Another building, the tallest in the City, opened last year with a 58th-floor viewing gallery called Horizon 22, and one has also opened up at the top of the new neighboring tower.

Demand for sustainability is strong, and four-fifths of the district’s buildings already meet top standards, Mr. Joshi said. Older buildings are struggling with occupancy, and in response, the corporation is loosening rules to convert them into venues for culture, higher education or hospitality.

Still, the overall focus is clear. “Our basic policy is office first,” Mr. Joshi said.

That stance was seemingly vindicated this summer by the news that HSBC would move its headquarters back to the Square Mile more than two decades after the bank was lured away to Canary Wharf. About six months earlier, the legal firm Clifford Chance had also said it would move to the City from Canary Wharf.

“These traditional firms from the City, like legal and banking, are looking back towards the Square Mile as their cultural home, their heritage home, where they first started from,” Mr. Joshi said.

After more than three centuries as Britain’s financial center, the City of London struggled from the 1990s to compete with Canary Wharf, former docklands that were redeveloped for high-rises that could offer much more space for banks and their trading floors. Expansion in the Square Mile was thwarted because of proximity to St. Paul’s and other historic buildings.

In Canary Wharf’s first years, many businesses were reluctant to move there, and the project almost failed amid a recession and the 1992 bankruptcy of Olympia & York, the company behind the development. But better mass transit links arrived, and companies followed.

By the early 2000s, Canary Wharf was bustling, said Lucy Newton, a professor of business history at the University of Reading’s Henley Business School. “It did take a while to get off the ground, but it had that support from financial institutions who felt they’d outgrown the City,” she said.

Three decades later, the tables have turned. Successive London mayors have loosened the Square Mile’s planning rules, and towers have shot up. There are still regulations protecting views of St. Paul’s and the Tower of London, and Mayor Sadiq Khan has ordered the district to confine towers to certain areas, but the density is going to increase.

“You can’t build out because you are a square mile, so you can really only build up,” said Chris Hayward, the corporation’s policy chairman and Mr. Joshi’s predecessor at the helm of the planning committee. In his three years leading that committee, “we built more tall buildings in the Square Mile than ever in the history of the Square Mile,” he added.

Just five months ago, the City of London Corporation approved a 63-story tower with 800,000 square feet of office space and room on the top floors for public events. Schroders Capital, the investment manager behind the project, described it as “a clear, long-term commitment to the City of London.”

To bolster its growth prospects, the City is trying to shed its image as a stuffy corporate neighborhood by luring more people to spend time there in the evenings and on weekends.

The Square Mile has about 9,000 residents, and officials are coaxing visitors with more leisure activities and well-known restaurants like the Wolseley, and highlighting its cultural attractions, including a new home for the Museum of London.

“We’ve never considered ourselves as a residential city,” Mr. Hayward said. “Pepper-potting residential development around the City actually constrains that business growth, that commercial growth, that we want.”

The Wolseley is hoping to be a part of that growth. For its second location, the high-end restaurant chose a spot near the north side of London Bridge, a gateway to the City. The company is also betting on a stronger return to the office as well as more tourists and residents to support the restaurant, which is two-thirds larger than the original.

“I think eventually a majority of people will come back to their offices Monday to Friday,” said Baton Berisha, the chief executive of the Wolseley Hospitality Group.

Kate Hart, the chief executive of the business improvement district where most of the towers are clustered, works with area businesses, which have about 80,000 employees. Her zone is still troubled by empty storefronts, including at Leadenhall Market, a protected landmark.

“There is this real drive to get people to come back to the office,” Ms. Hart said. But they need to see a benefit to commuting, she said, adding, “You can’t have that vibrancy if you don’t have that work force back.”

Even as more planning requests come in, not everyone is roaring ahead. The developers of 1 Undershaft, the building set to be the tallest, sent their architects back to the drawing board this year to adjust the design, seven years after the tower was granted approval.

And Landsec, one of the largest commercial real estate firms in Britain, with more than 10 billion pounds in real estate assets, is pivoting away from the City of London. In the past three years, it has sold office properties worth £2.2 billion across London, almost all in the City, halving the company’s assets there.

Landsec is shifting to the West End and an area near Waterloo, London’s busiest train station. Those neighborhoods have “a raft of bars and restaurants and the kind of mixed-use nature that makes it appealing to a much wider range of people than just people that rock up to an office to do some work,” said Remco Simon, the chief strategy and investment officer at Landsec.

But Landsec is not abandoning the City. The company owns One New Change, one of the biggest retail spaces in the district. The mall has been hammered by the departure of big brands, and most of the shops on the lower floor are empty. Landsec has reversed some of the downward momentum by bringing in a Formula 1 arcade, and the restaurant on the roof that overlooks St. Paul’s Cathedral remains popular.

And it’s still open to the potential of some office space there. Last month, Landsec received approval to demolish a building it bought in late 2020 and replace it with a 23-story tower with office and retail space. That said, “we haven’t committed to building the building,” Mr. Simon said.