In London’s Canary Wharf, HSBC are exiting and Credit Suisse could soon follow. DekaBank has decided to leave its aging skyscraper in Frankfurt’s ensemble known as Mainhattan, while Paris’s La Defense is losing one tenant after another.
Europe’s high-rise financial districts have been hit hardest by the turmoil sweeping office markets around the world, and with vacancy rates soaring and valuations plunging, the pain is set to intensify.
Banks and other prime tenants are looking to make going to the office more desirable as part of a post-pandemic reset, and instead of giant glass and steel towers styled after Wall Street, they’re opting for smaller sites in locations closer to shops and restaurants. It also reflects the changing needs of banks as the shift away from wholesale trading means there’s less need for the vast floors that proliferated before the financial crisis.
The trend means neighborhoods like London’s Mayfair and Paris’s 7th arrondissement — home to the Eiffel Tower — are booming. By contrast, oversized financial centers like Canary Wharf, La Defense and Frankfurt’s US-style downtown are facing massive, high-risk investment to avoid becoming ghost towns.
“For these mono-cultural districts, we are going to have to see them change over time,” Kathleen McCarthy, global co-head of real estate at Blackstone Inc., said in an interview. They’ll need to appeal to a broader array of tenants and evolve into more of a mix of work, life and play, “that can take a long time and it can be a little bumpy for people that own those assets,” she said.
Vacating Canary Wharf
Major office tenants are leaving London’s second-biggest financial hub
Sources: Data compiled by Bloomberg News; OpenStreetMap contributors
Note: *Owner Cheung Kei defaulted. †Planned refurbishment will expand total space to 200K sq. ft. ‡Leased but currently unoccupied.
To revitalize existing neighborhoods, policymakers are breaking with decades of stringent planning that prescribed only certain building uses in each area. The City of London — traditionally focused on office space — has added more restaurants and now aims to remake older buildings into hotels, while New York is pushing residential conversions.
Urban planning has long shifted toward mixed-use spaces that combine residential, retail and offices alongside public services. The “15-minute city” concept calls for daily needs to be within a short trip from someone’s home. All new major developments in Europe follow some aspect of the trend — from Barkarkby outside Stockholm and Ellinikon near Athens to the redevelopment of Tegel airport in Berlin and Milan’s former Expo center.
Canary Wharf Vacancies Are at the Highest Since 2006
Quarterly vacancy rate in London’s core Docklands and Canary Wharf areas
Source: CoStar Group
Revivals are becoming increasingly urgent for the high-rise districts that had their heydays around the turn of the millennium. Vacancy rates in La Defense — Europe’s largest purpose-built business district, located five kilometers (three miles) from the Arc de Triomphe — hit 20% at the end of the first quarter, compared to 3% in central Paris, according to CoStar Group. About 15% of the office space in Canary Wharf is empty, well over double the 6% rate in London’s West End, figures from the real estate data provider show.
It’s a similar situation in Frankfurt, where the vacancy rate is twice that of Berlin and Munich. Over 1 million square meters of space lies vacant in Germany’s financial center. That’s equivalent to more than eight times the space in the Commerzbank tower, Frankfurt’s largest office building. And the new Four complex, where Dekabank will move, adds to the competition.
“None of us want to work in an office district where all you’re going to get is Pret a Manger,” said Chris Staveley, head of EMEA office at real estate firm JLL, referring to the British sandwich chain. “Landlords have been slow in thinking about the end user.”
In La Defense, the owners of the Tour Eqho face a nervous wait to see if KPMG, which occupies almost 60% of the building, opts to vacate. The accounting firm declined to comment on whether it plans to take advantage of an option to break its lease next year. The timing is delicate with a loan used to finance the purchase of the building — nicknamed “the urinal” by real estate brokers because of its distinctive shape — maturing in 2026 and upgrades looming for the 40-floor tower built in 1988.
La Defense Vacancies Set New Record
Quarterly vacancy rate in Paris’s business and financial district
Source: CoStar Group
The South Korean investors that own two of Frankfurt’s largest buildings — the Commerzbank and Trianon towers — are in the midst of attempting to refinance after buying the buildings for high pre-Covid prices. In a sign of the concerns, Samsung has already tried and failed to sell the Commerzbank tower once in the past year, even though Germany’s second-largest listed bank still has eight years left on its lease.
The fading fortunes of these districts raises the dilemma of what to do with the aging behemoths that banks leave behind. The scale of the buildings makes them incredibly expensive to refit, and it’s uncertain what level of demand there might be for the space even if owners do pay for upgrades.
Frankfurt Vacancies Have Climbed Since the Pandemic
Annual vacancy rate in Germany’s banking center
Source: CoStar Group
The risks have already become reality at 20 Canada Square in Canary Wharf. The 12-floor building is now in the hands of receivers after its Chinese owner failed to repay a £265.5 million ($342 million) loan. The cost of upgrading the near-empty tower is in the region of £120 million, according to people with knowledge of the plans.
After taking account of the investment needed and the risks involved, potential buyers are expected to offer substantially less than the outstanding value of the debt currently secured against the building, meaning it might sell for well under half of the £410 million paid in 2017.
Re-purposing proposals include converting the space for use by life sciences companies. But creating lab space can be even more expensive, requiring enhanced ventilation systems with potentially separate ducts for harmful gases. The additional machinery may require thicker floor slabs meaning these types of conversions may only work in buildings with higher ceilings.
Down the street, HSBC’s global headquarters at 8 Canada Square faces uncertainty after the bank decided to leave in favor of a smaller office space in the City of London. The 1.1 million-square-foot building is in need of significant upgrades to meet energy-efficiency rules and lure new users. But the bigger the building, the higher the cost of modernizing.
Applying similar costs per square foot as the proposed 20 Canada Square project, upgrading HSBC’s 45-storey building would run about £250 million. The question is whether such undertakings will ultimately pay off when even fully refurbished buildings in Canary Wharf are struggling. The recently completed YY building — a total overhaul of the former Thomson Reuters headquarters outside the district’s metro station — has yet to secure tenants.
Read More: In London, New York and Paris, a Giant Office Bet Goes Wrong
That’s a stark contrast to conditions in posh Mayfair, a few kilometers away. Blackstone last year signed the lease on an entire new development on Berkeley Square before construction work had even started. The firm won’t move in until 2028 at the earliest.
The costs and risks of refitting a massive tower block represent a major investment even for well-capitalized landlords like Qatar Investment Authority, which controls 8 Canada Square and co-owns Canary Wharf Group together with Brookfield Corp. At the 21-year-old HSBC tower, the sovereign wealth fund is sketching out options that include a mixture of uses including a shared auditorium, converting some of the building to lab space and keeping some as offices.
Read More: Why a Crisis Is Looming in Commercial Real Estate: QuickTake
To be fair, Canary Wharf Group has been planning for a post-finance future for at least a decade. In 2012, it appointed architect Terry Farrell to develop a master plan for a neighboring site. Even then, the brief was that it should have a very different feel and include homes.
That plan brings the development closer to becoming a 15-minute city, and Canary Wharf now boasts almost 150 places to eat and drink, five shopping malls, doctor’s offices and even a school. The district’s restaurants and stores are busy on weekends and the recently opened Elizabeth Line — which connects to Heathrow airport via central London — improves access.
But the gradual overhaul may be too little, too late for international investors that snapped up assets for high prices before the pandemic when money was cheap. They now face hefty refinancing and upgrade burdens, and without patient capital and local knowhow, they could get caught out.
“I get asked a lot, why we have boots on the ground,” said Joanne McNamara, executive vice president for Europe and Asia of Oxford Properties, the real estate arm of Canada’s Ontario Municipal Employees Retirement System. “It is to manage exactly that risk. These big bets on one asset, whether it is in La Defense or wherever, it is all about stock selection.”
— With assistance by Demetrios Pogkas, Feargus O'Sullivan and Stephan Kahl
