The answer lies in the medium-term future for London as a manufacturer of financial services. If London's financial sector is going to grow through the 1990s then eventually the spare capacity will be mopped up. If not, the problem continues. More about the supply of space in a moment; first, a word about demand.
Over the eight years to 1989 London employment in financial and business services grew by 43 per cent, to reach 620,000 people. That was the force driving up office rents, particularly in the City. Employment will have fallen slightly since then, particularly in business services, the sector that grew most quickly in the 1980s. Will it recover with the rest of the economy?
The best way of answering the question is to look at different sectors, for employment in different sections of the industry has followed different trends.
Banking is the largest employer, with some 240,000 in London at the peak. It seems clear, to judge from recent statements from the banks, that this total will fall over the next five years. All the large British banks are shedding labour, either through redundancy programmes already announced, or through natural wastage. There are further announcements in the pipeline. Although these losses will be spread across the country, London will take a large share, for it accounts for one-third of the output of the financial services sector. A reasonable assessment would be that London employment will not fall back to the level at the beginning of the decade of 175,000, but will stick at around 200,000. If it did, that would be nearly a 20 per cent fall, which would be more or less in line with the big banks' medium-term plans.
The next biggest sector is business services, which employed 190,000 at the peak. This is a catch-all group, encompassing more or less any white-collar activity selling to the business community: leasing of equipment, property services, etc. Because it covers such a wide range of activities, and so many different types of employer, there is no easy way of estimating overall employment by looking at a few big players. But since this sector is very much a tertiary one - by definition it consists of businesses that supply services to other businesss - so the only sensible assumption is surely that employment is unlikely to rise over the next two to three years. It may fall.
Much the same arguments apply in the next category, legal and accounting firms, which overtook insurance in the middle 1980s and employed more than 100,000 in 1989. Several of the big solicitors and accountants have been gently squeezing back their employment levels over the past year, and while there is unlikely to be a dramatic fall in numbers, it is very hard to see any growth for the next two or three years.
Finally insurance: here employment has been static over the 1980s at about 80,000, if anything falling slightly as jobs were transferred out of London, mostly to other locations in the South-east. It is still a little unfashionable to admit it, but it does seem the insurance cycle is at last turning upwards, so further net job losses are unlikely. But insurance will not come back as a much bigger employer in the immediate future, even if the improvement in trading conditions is sustained.
Put this together and it is very hard to see any circumstances where employment in the London financial services industry might rise over the next three to five years. London's international business is not doing at all badly, for it is gaining ground in some sectors like foreign exchange and derivatives trading, and international securities business. But while they pay well, these are not big employers by comparison with the banks. Demand for space, in terms of numbers of people behind desks, will tend to fall.
On supply, the picture from the property market's point of view is fairly gloomy. A string of net lettings are being announced as businesses relocate to the new, high-quality office space that is becoming available. The headline rents seem acceptable enough, typically in the pounds 30- pounds 35 a square foot region, but this may conceal expensive inducements which, properly costed over the life of the lease, would bring the real rent down into the pounds 20- pounds 25 region. Generally the old space vacated stays vacated, so that the City's vacancy rate remains about 20 per cent.
Over the next two to three years the property owners are going to have to make some tough decisions on whether to upgrade this old space and let it out at whatever it will fetch, or simply leave it empty. In practice they will have to upgrade and rent, for it is better to have some income than none at all. This will be wonderful for London as an international office centre, for it will become a relatively cheap location compared with other large financial centres. But it will not help the property market.
Looking ahead then, the sensible assumption would seem to be that the financial services headcount will not rise for at least two or three years and will meanwhile tend to fall. Some space will be mopped up as individuals are made more comfortable, a rational decision since the space costs far less than it did five years ago. But this demand, when it comes, will not be enough to mop up much of the cheaper, refurbished space. What happens to that?
That is perhaps the most interesting question facing the London property market, and no one knows the answer.
Schemes like Broadgate will always find tenants, even if they also bring misery to their developers. Second-rate property will present London with an opportunity that it has not had at any stage since the 1930s: lots of cheap office space.
The market ought to absorb it. But at the moment it is very hard to see what those uses will be. If, somewhere out there, there are new businesses waiting for cheap rents to take off, the London office market could be much healthier in five years' time. But it may take longer. There will be another London property boom, but a rational analysis of supply and demand suggests that it will be around 2008, rather than in 1997.Reuse content