Canary Wharf is battling the death of the office. As the London docklands hub for global banks enters a second wave of a virus-related exodus, premium tenants like Morgan Stanley may jump ship. For the complex’s owners, Canada’s Brookfield Asset Management and Qatar Investment Authority, some out-of-the-box thinking is called for.
The Wharf, where Breakingviews’ parent Thomson Reuters has its UK headquarters, is emptier than it looks. While there are still queues for its falafel stands, 80% of its workers are at home. A brief return of office staff was quickly reversed when Covid-19 cases began rising in September. The doomsday scenario for Brookfield and Qatar is that working from home becomes permanent, and big banks need substantially less space. That might encourage firms like Morgan Stanley to downsize and pay 100 pounds per square foot in the City for a smaller head office, leaving Canary Wharf rents to fall from their current 60 pounds per square foot.
Brookfield’s Plan B has the virtue of simplicity. Currently 90% of the Wharf estate is used as office space for lawyers, accountants and bankers. The new idea is to divert its focus to residential and short-term apartments for foreigners and workers. If it pans out, 30% of the complex’s space could be used for living instead of working.
Brookfield has already started. It has brought the Edyn brand of short-term swanky serviced apartments to the Wharf and is already renting them out for around 100 pounds a night. If it takes off, the idea would chime with a significant shift towards remote working. Bankers and accountants living outside London could commute into Canary Wharf to work and live in short-term accommodation for three days a week.
In the short to medium term, however, plenty of the wrong type of disruption lies ahead. Hong Kong’s Link REIT recently bought Morgan Stanley’s building, The Cabot, for 380 million pounds on a lowish rental yield of 5%. But as the post-pandemic unemployment hangover kicks in, rents and property values could fall. Canary Wharf Group’s six biggest buildings have net debt of 1.4 billion pounds and were as of June valued at 3.3 billion pounds. This implies some capacity to deal with such a slump, but the group has gone bust once before, in 1992. If things deteriorate further, its Plan B will have to take up a lot of strain.