It’s not obvious from the exterior of Mattel House that it was once home to the maker of Barbie and Hot Wheels. The building’s facade of smoked glass and red brick would once have spoken of slick modernity; now it squats unloved among a hodge-podge of other Eighties offices on the Vanwall Business Park, 15 minutes’ walk from Maidenhead town centre, empty since 2019. But Mattel House may finally be about to get a new lease of life: Bellway, the housing developer, has submitted plans to turn it into 91 homes.
A high-density housing development is an awkward prospect in this part of the world – neighbours include the huge corporate offices of the pharmaceutical company AbbVie and the huge corporate offices of the software company SAP, not to mention a Volvo dealership. The nearest supermarkets are in town, where the rest of Maidenhead’s residents live. But its developers don’t have a lot of choice. After an attempt to repurpose the building as “One Vanwall”, an airy, glass-and-steel office, a conversion to dwellings may be the only way to bring the building back into use.
Mattel House is one building in a wider trend that has been taking place since before the pandemic: out-of-town offices are looking like an increasingly bad investment. And the investors stuck with these assets aren’t all property developers or funds: many are British local authorities.
It’s hardly big news that since the pandemic, office occupancy in the UK has fallen – according to the British Council of Offices, the amount of office space occupied in the UK has plateaued at 30 per cent, about half the level it was before Covid. But that’s not the full picture: it ignores, for example, the success of the so-called prime markets such as central London – and the decline of out-of-town business parks.
High-end offices are as popular as they’ve ever been: lettings in central London were 71 per cent higher during the second quarter of this year than they were during the same period of 2021, according to Jones Lang LaSalle. But when it comes to lower-grade spaces – the Eighties-built business parks of Swindon, Reading and city suburbs – things are looking shakier.
A report by the estate agent Lambert Smith Hampton shows that on the outskirts of Birmingham, take-up of office space will be down 30 per cent on the ten-year average this year, vs a drop of just 10 per cent in the city centre. In Glasgow, that figure is down 58 per cent, compared with a 12 per cent fall in town. In Leeds, take-up during the first three quarters of 2022 was down 52 per cent on the same period last year – exactly twice the 26 per cent fall in the city centre.
This could prove a major problem for local councils. With budgets depleted by years of austerity, many local authorities have in recent years sought ways to increase their capital – and settled on borrowing to invest in property as a solution. But under George Osborne, the amount councils could spend on new housing had been capped by rules on the amount of debt they could have in their Housing Revenue Account (HRA), so that left commercial property. By the time the HRA cap was lifted in 2018, an investigation by the Bureau of Investigative Journalism found British councils had borrowed billions to invest in supermarkets, business parks and offices.
Between 2017 and 2019, councils spent £6.6bn on commercial property; in 2020, worried by the extent of the craze, the government banned them from making property investments. But that came too late for some: last week Thurrock council admitted it was on the brink of bankruptcy after it made a £275m loss on its investments.
The knock-on effect of falling office valuations at the lower end of the market could mean disaster for councils like Runnymede, on the outskirts of London, which was revealed in 2018 to have borrowed £526m – 15 times its £34m annual budget – to make investments including the £81m it spent on Pine Trees Business Park near Staines, and the £50m it spent on One Delaware Drive outside Milton Keynes, currently the home of Volkswagen Financial Services.
The problem is that offices need investment, or they die. “Business parks where individual assets have been sold off to different investors are finding it particularly difficult to compete owing to the lack of investment or a coherent asset management strategy,” said Charles Dady, head of national office leasing in the UK at Cushman & Wakefield.
Many councils just can’t afford to spend that cash, at a time when tenants are shrinking their footprints and reallocating their budgets to smaller spaces that have enough bells and whistles – cafés, meeting pods, manicured surroundings – to lure workers back to the office (for part of the week, in many cases).
Andrew Willcock, head of Greater London and South East office market at Savills, said the owners of lower-grade office space just can’t compete: “If rents are, let’s say, £20 per square foot… you can’t really afford to invest in the buildings. That’s a problem. That’s the kind of stock that is going to struggle.” Separate research by Lambert Smith Hampton indicates that the amount of vacant stock is about to explode: in the south-east alone, 26 million square feet of office space could be about to become redundant; 72 per cent of employers said they are planning to reduce their office space.
If recent trends in property are anything to go by, it doesn’t look good for councils. Last week the US fund Blackstone’s $125bn real estate investment trust (REIT) limited withdrawals after a surge in the number of investors requesting redemptions. In the UK things are going similarly swimmingly: last month British Land, one of the UK’s largest REITs, warned that the value of its property portfolio – which is mostly composed of offices and retail spaces – had fallen 3 per cent in the six months to the end of September.
If that’s the situation for the world’s most affluent investors, it’s hard to see how council-owned properties will compete. “The general theme is flight to quality,” said Willcock. “What we will see is, more tired business parks or older buildings are just going to fall by the wayside.”