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Spencer Levy
On a recent trip to London, we found a cityscape bustling with cranes and other equipment, signs of development in the air. It's a trend that's not all about new construction. It's being driven in large part by a push towards the rehabilitation of existing buildings. On this episode – grab a hard hat! – we're on site at CBRE's U.K. headquarters in the West End to hear tales of construction, of office real estate and more in the U.K. and other markets across Europe.
Steve Skinner
I think it’s a much more positive environment in Europe than it was in the start of the year.
Spencer Levy
That's Steve Skinner, CEO of Development for HB Reavis, a pan-European investor, developer, and asset manager. HB Reavis has a portfolio of properties that include office, retail, and hotels, plus millions of square feet that are ready to be developed with projects in those sectors, as well as various forms of residential.
Allistair Perks
We sold two sites this year to co-living groups for conversion opportunities for existing buildings. So, there's quite a deep and resilient pool of alternate bidders for smaller assets.
Spencer Levy
And that's Allistair Perks, a CBRE Executive Director who's Head of London Development and Asset Renewal, work which, in the U.S., we often call adaptive reuse. Allistair advises clients broadly on development and has particular expertise on the retrofit of existing properties.
Simon Brown
It's a dynamic market, it's scarce in terms of the amount of land there is and the opportunities that present themselves get taken.
Spencer Levy
And last but not least, CBRE's Head of U.K. Office Research, Simon Brown, will help us dig deeper. Simon has specialized in office research, providing thought leadership data and reporting at CBRE since 2011. Coming up, development in the U.K. and beyond, with a focus on asset renewal. How and why that practice may be leading a revival. I'm Spencer Levy, and that's right now on The Weekly Take.
Spencer Levy
Welcome back to London, and to help us talk about development, we have with us Steve Skinner, the CEO of Development for HB Reavis. Steve, thanks for coming out.
Steve Skinner
Pleasure to be here. Thank you.
Spencer Levy
Great to have you, Steve. And we have our own Simon Brown, head of U.K. Office Research. Simon, always good to see you.
Simon Brown
Good to see you too.
Spencer Levy
And then we have Allistair Perks, Executive Director and Head of London Development and Asset Renewal CBRE. Thanks so much for coming out.
Allistair Perks
Great to be here, Spencer.
Spencer Levy
Great to have all of you here today. Let's start with you, Allistair, if you don't mind. I think the hottest topic for a while in the United States was the conversion of obsolete or older office into multifamily or another use. But the challenge in the United States has been it's very difficult to do, very expensive to do, very hard to get the permitting, and in some cities there's almost none of it happening. What's happening here in London?
Allistair Perks
So, I think there is more happening here in London. We've got a city that's categorized by different types of building stock. We've got some large commercial areas with large buildings that are of course very suited for continued commercial use, but we also have much smaller grain properties. We're here in the middle of the West End at the moment. This is an area that's categorized by smaller street grain, smaller blocks and these smaller buildings really are very good candidates for conversions. Clearly, we have the issues with permits and planning. Not all local authorities in the capital are as persuaded by conversion arguments. But just to give you a couple of stats, 90% of the transactions that we advised on last year were for conversion.
Spencer Levy
90%.
Allistair Perks
90%. In the last few weeks alone, we've done five different land deals, and four of those were for conversion purposes.
Spencer Levy
It's one thing to advise on, it's another thing to actually swing a hammer. How many of them are actually happening?
Simon Brown
Yeah, they do happen, but one thing I think we should point out is it's not a one-way street. Most people think about conversion in the sense of office to other use because of changing office use. But, again, we're sitting here, Henrietta House, over the road, big department stores. About a million square feet of Oxford Street department stores are being changed, and the majority of that into office space. And one of those buildings, the former Debenham is now called the M Building, CBRE has pre-leased that building in its entirety before completion. So, that's really just the story of London, which is that uses adapt, areas change, and the mix of real estate has just evolved over time. And a lot of actually the biggest West End office to other use conversions happened prior to 2020. So we've got the old U.S. Embassy in Grosvenor Square, former JLL headquarters even turning into part hotels. All of these things were before 2020.
Spencer Levy
So, let me just clarify a comment you made. Much of the retail or older big box retail that's on Oxford Street, you're suggesting is being converted or has been converted into office.
Simon Brown
By no means a majority of it, but roughly a million square feet. So a significant amount, but the total volume of retail space in Oxford Street significantly outstrips that.
Steve Skinner
Just from a developer's point of view, I think for us historically we've delivered more new build than refurbishments. But I do think there's an argument today that with build costs so high, permitting taking so long, you know, the high carry cost of both debt and equity for a substantial period to do new development, plus the sustainability angle of less embodied carbon to do refurbishment rather than new build, that it can make more sense than ever before to look at refurbished money. Caveat to that was I don't think we should have a prescriptive approach to it. I think we need to focus very carefully on the building's individual configurations, floor plate depth, access to natural light, to see if it's, you know, appropriate that the building can be reused or repurposed and I think here, especially in the U.K., we need to make sure we have a prescription approach to refurbishment over redevelopment and actually end up long term with poor quality buildings because I think that's a bad outcome for people.
Spencer Levy
Allistair, how many of our clients on the occupier or the user side are saying this is a material advantage versus a new bill?
Allistair Perks
I think both our investor and occupier clients are taking sustainability and ESG performance very seriously across the board. And I think they're seeking the best buildings, the best performing buildings, and that's very important to them at a corporate level, it's very important to their employees, and it's still very much at the top of the agenda. I think in terms of how that's achieved, and to Steven’s point, whether it's achieved through a sustainable use of a plot of land, and look, we're in the middle of central London here, this is an incredibly accessible and sustainable location and should actually this be the place where we are permitted to deliver new build ground up construction and does that have a better whole life carbon story than perhaps a sub-optimal reconfiguration of an existing building. There are arguments about that and discussions going on all the time. But in terms of what our clients are kind of seeking, I think it's the best performance and I think they're actually kind of open minded as to whether that's achieved through a ground up scheme or through repositioning of an existing building.
Spencer Levy
So, Simon, how much new builds are we seeing in London?
Simon Brown
The total amount of space under construction in central London is high at the moment. But what's really notable is that a lot of these schemes, the majority of which started speculatively, are actually pre-let. At the moment, we've got about 13 million square feet under construction of office space within London, 46% of that is already pre-let. The figure for the city is higher, it's about 58%. So, whilst you do see a lot of schemes under construction, a lot of those have been pre-committed even several years ago.
Spencer Levy
So pre-let buildings, not a lot of spec construction.
Simon Brown
Not a whole lot of spec construction coming through. And I'm sure we'll come onto it, but whilst we see a lot of cranes currently, the dynamics that we're seeing in the market at the moment make us question the viability of that development pipeline beyond this set of cranes. So, if you look at what's penciled in for 2028, 2029, it's starting to look really quite thin.
Spencer Levy
Before we switch to continental Europe, for just a moment here, we had on this show actually a U.K.-based Swire Properties who own the Mandarin Oriental down in Brickell in Miami, and a very interesting case study where they have this beautiful hotel only 25 years old, but the highest and best use of it was demolition. They were demolishing the hotel, putting up a new hotel plus 200 residential units starting at $5 million each. My question is really, are we going to see a massive demolition cycle here versus a refurbishment cycle? We all agree that it's greener to reuse the existing structure, but we have the math which is so difficult on these reuse buildings. What's your point of view?
Allistair Perks
We're seeing far less demolition today than we ever have, and the reasons for that are embodied carbon, as we've touched on, and the planning restrictions that now set a much, much higher bar for demolition of any property. So that's causing people to think much more laterally about how can they reuse existing structures. The other side of this, I would say, however, the London market, we focused on offices, but in most locations, there's really good, strong competition between other sectors. So, if a building doesn't work for offices, and we've talked about the kind of, you know, the sort of flight to quality and large floor plates with all the generous characteristics and amenities, for those properties that don't tick those boxes, those same qualities may be smaller floor plates, lower floor to ceiling heights and more sort of smaller grade floor plans can work very well for living uses. I think it's sort of starting to soften now, but we saw a lot of those post-COVID, a lot smaller buildings become vacant. So a lot of call on our services to run highest and best use analysis and find alternate economic uses for these buildings. But we're finding there is a pretty deep market for those. We just sold a building a few weeks ago, which was one of these smaller sites, and it sold to a private hotel group. We've sold two sites this year to co-living groups for conversion opportunities for existing buildings. So, there's quite a deep and resilient pool of alternate bidders for smaller assets. So, in terms of whether those buildings inevitably end up being demolished, I don't think they do.
Steve Skinner
The maths here is probably easier on refurbishment than it is new build today because the new build costs as I said before are so high. I suspect you'll see, you know, redevelopment only where you can add seriously, a seriously new amount of massing to a site. If the – we have very strict planning regulations here in terms of controlling the height and the massing of buildings and I think if you can't add massing, significant massing as in double the mass I don't think the maths will work to redevelop and then you're into refurbishment. And I agree with Allistair, when you look at the most valuable land use, even this centrally located, often it's definitely not offices.
Spencer Levy
It's very interesting because I would suggest, and not to disagree, but just to give you a different perspective, a lot of the developers I've spoken to just can't convert. They just – now we've had several episodes of this show with people who are active converters, but I would say the majority of the developers are leaning heavily towards land ground up development or even demolition than conversion. I guess what you're saying here in London, it may be the opposite.
Allistair Perks
I think it's our building stock that gives us some optionality, smaller grain buildings that are more readily convertible.
Spencer Levy
Simon, let me just ask you just a very basic question here. Do you have any sense of what the average floor plate size is of a building in London?
Simon Brown
You know what, I don't, but in terms of the deals being done, where the most activity that we're seeing at the moment with the highest values, they're pretty large floor plates. So, if you're a tenant of probably 40,000 square foot plus, you don't want to be split over more than a couple of floors.
Spencer Levy
Now those are the office tenants that are using it for office purposes, but for conversion purposes I'm going to speculate that those buildings typically have smaller plates. Is that a fair way to put it, Allistair?
Allistair Perks
For all the reasons we understand, access to daylight, conversion of a floor plate to multiple units. We've got planning restrictions around having too many units that have a single aspect. So having sort of plenty of corners is obviously very useful for conversion of floor plates. So, exactly at that point, those smaller floor plate buildings do readily convert.
Simon Brown
But these department stores have got massive floor plates, they're retail buildings, and they've got big floor plates so they're suitable for modern office tenants. I do think it's important to stress it's not an entirely one-way street, this conversion story.
Allistair Perks
It's so important and if we do think about London in terms of the West End, I mentioned it's got constrained floor plates for much of this area, Oxford Street, there are very large buildings and that's exactly what tenants want and that is exactly where the demand for that new space is coming from.
Simon Brown
And, also, right next door to us we had a car park converted into a hotel. I mean it's a dynamic market, it's scarce in terms of the amount of land there is and the opportunities that present themselves get taken.
Spencer Levy
Steve, let's pull the lens out for just a moment. We're talking about your mandate, which is not just the U.K., but Europe. What are some of the highs and lows of developing in Europe? What are the cities that look most attractive? Some of the cities are more challenging.
Steve Skinner
At the start of the year, Europe, in general, was probably looking at the U.S. with some envy. I think U.S. was in its full expansion phase. I think European companies were fed up with low valuation multiples compared to the flying U.S. equity markets and, in general, worried about much lower levels of growth. So – but I think that mood has changed significantly over the last few months. And I think the volatility created in the U.S., along with the other ongoing pockets of macro instability elsewhere in the world, has people looking at the relative stability, transparency, and more supportive rate environment offered by Europe, which I think you can see by that diversion of the 10-year treasury and 10-year German bond. And if you play that back to how investors are feeling in Europe, I think it depends, you know, what they were invested in, in terms of in the zero rate, let's buy anything era. I think people were chasing yield, which probably the real yield didn't exist because of vacancy and capex risk. And those assets have basically turned into a value trap for many investors, so poor quality assets in poor quality locations and I think those investors are slightly struggling for liquidity. Today, if you were at the end of investing in or developing high-quality, well-located assets, yes, there was a correction in price, but the bounce back in terms of NOI performance and liquidity in those assets has been significant. So, I think if you are sitting there today owning those assets, you probably see quite a lot of opportunity across Europe, especially with a much more rate-supportive environment. You know, the ECV has cut down to 2% already. So, when you start thinking about investing across Europe, there's probably a positive carry which doesn't exist in the U.K. in terms of your yield over your debt cost.
Spencer Levy
The debt costs are so much lower there.
Steve Skinner
Yeah, it's so much lower and the yields aren't that much lower than here in the U.K., so there's a positive spread there. And the NOI is growing very quickly because, you know, just like in the U.K., there's been a real lack of quality of new stock because of the development economic viability. So, you know, there's probably a moment in time where you can acquire assets at a very attractive yield over debt spread, plus you've still got the forward-looking NOI growth available and, you know, I think that window is only available for a short period to be able to catch up both of those things. So, I think it's a much more positive environment in Europe than it was at the start of the year.
Spencer Levy
Allistair, when we're talking about uses, I know we focused quite a bit here on office. Talk to me for a moment about some of the other uses that you're seeing our clients talk about, obviously the conversion to multifamily, conversion of hotels, but other uses you're finding attractive in the city of London.
Allistair Perks
So, this is the great thing about London, it's always kind of evolving, and we always do get interest from a range of different sectors. And frankly, it's what makes development particularly exciting, I think, in a city like London. So, we, at any given time, will have kind of interest in projects that we're perhaps disposing of from clients from a range of sectors. So, there's the mainstream sectors that we've touched on – commercial offices, residential of different tenure types and different varieties and hotels. But alongside that as well, we just transacted actually with a private health care group on a major new facility in West London.
Spencer Levy
When you say health care, is this like a hospital?
Allistair Perks
Yeah, yeah, yeah. So a new hospital facility for an overseas health care group. That is one of six different health care, private health care requirements that are active in London at the moment and the majority of these are coming from overseas as well. We're here actually not far from the Harley Street Medical Cluster which is obviously a very active zone in the West End but I'm talking about probably larger space takes than Harley Street. These are kind of 100,000 square foot plus requirements for private hospital facilities and that's in turn – just as a small example, is driven by an aging population in the U.K., an increased reliance on health insurance and more people able to access private healthcare than ever before. So that's obeying its own set of economic criteria which is driving that growth. Alongside that, there's private education groups that are also looking at the market.
Spencer Levy
When you say private education, be more specific, is this college or is this primary?
Allistair Perks
So both, actually, both. We see interest from, again, this is primarily private groups, often international, international school groups looking for a London foothold. And these are often global systems, education systems that want a London base.
Simon Brown
There has been quite an uptick in deals to the likes of North Eastern, NYU is another example of those, several others. Also some English universities taking London campuses, Northumbria, Warwick, Coventry, there's a few of those examples that we've seen as well. We've also seen brand new demand in an area, Stratford, which is where we had the 2012 Olympics, that's being underpinned by a big educational campus which happens to be University College London. It just goes to the dynamism of London and the nature of London and the nature of European large cities, which is large mixed-use, as we always say, live, work, play destinations. And it's those destinations that have those mixes of use, education and health being really important amongst those, that will win effectively.
Steve Skinner
Our retail portfolio is absolutely booming after COVID. I mean, I think we were one of the very few people who developed at least a shopping center through COVID. I mean we opened a 2.5 million square foot gross shopping center in 2022.
Spencer Levy
Where?
Steve Skinner
In Bratislava, in the center of Slovakia. It's amazingly well located. It has a tram station outside. It has a bus station inside. It has ample car parking. But you look at the seven day a week footfall, you know. We have an annual growth rate there in terms of footfall, over 20%, you know, the annual turnover of the tenants and the mix of tenants from international anchors to F&B to fast-moving consumer goods there has been huge and that's really been one of our best performing assets in terms a shopping center, which I think people wouldn't necessarily appreciate. And the same for the hotel portfolio, coming out of Covid, we've seen a massive rise in the average daily rate, not the ADR. And at the same time, the average occupancy is over 90%. So the rev power or the revenue per available room has increased more than 40% in hotels. But to pick up on the demand drivers for student, because we're about to do our first student scheme in London. And I think there's real macro and supply and demand dynamics around student. On the macro side, if you look at what's happening across the world, not just in the U.S., but in other locations where they are really restricting the number of students which can go into a country. If you want your child to go to an English-speaking, internationally recognized university, you know, really with the things the way out there in the U.S. at the moment, your option really is to come to London. So what that has created is a massive under-supply of beds, and some of these universities need thousands of beds and they need them centrally located. So I think the macro picture and supply and demand are coming together to create a real opportunity in student housing.
Spencer Levy
Simon, we're not here to talk politics, but we are to talk about the changes in the market post-Brexit. So, the U.K. is and was a financial services global hub, and there was concern about that post-brexit. How has that impacted demand? Where is the financial services industry today in terms of a demand driver in London?
Simon Brown
It's actually really an interesting story. All of the surveys of top global financial centers, ZYN being the leading one, is always New York and London number one or number two. I think London happens to be number two at the moment and New York's number one, but it does flip. And the amount of demand that we're seeing across the market from banking and finance sector is about as high as it has been at any point since the GFC. Now the GFC was the big disruptor to that market, much more so than Brexit. Post-GFC we saw financial regulation, that meant that a lot of these big banks had to shrink and we've been dealing with that consolidation ever since. But in the year since COVID, more so than the year since Brexit, we've seen the central and office market demand being driven by financial services, big banks in the city, small boutique financials in the West End. But the other thing I really want to pick up here, which is probably of relevance to your audience, is the boom in demand from U.S. domiciled lawyers. So if you look at the global leading 100 law firms, the majority of the big ones have got massive premises here in London, and it's growing enormously. Those occupiers going from maybe 10,000 square feet to in some cases two, three, 400,000 squared feet. So, enormous growth in that sector. And that's not directly the banking finance sector, but in many cases it's linked.
Spencer Levy
It's the ancillary services, or I'm sure accounting firms. Firms that service that sector are growing and law is a big one of 'em’.
Steve Skinner
Our firm was a benefactor of the retained demand from the banking and financial service industry when we were building a relatively large 300,000 square foot building speculatively in the city and actually Wells Fargo came along and not only police it, they actually bought it. That was their commitment to London and the U.K. They acquired the whole building, not on a lease, but they actually brought it from us instead.
Allistair Perks
I just want to say, I think that today's market has actually got all the hallmarks that could see more deals like that. That was back in 2017 –
Steve Skinner
‘17-’18.
Allistair Perks
But we're seeing again I think a little bit of a resurgence of those sort of owner-occupier led transactions and it's kind of no surprise because capital values are down, so in sort of cyclical terms real estate is cheap, rents are very high and have never been higher and I think there's many tenants to kind of looking at that rental picture. And looking at the value of the underlying real estate, and thinking, well, actually, I could just step into an ownership position here. We've seen major banks do that before. We've seen big tech companies do it in London, and now we're seeing further clients do it in the West End and the city, and my prediction is we might see more of that.
Simon Brown
One very recent example, State Street have bought a building for their own occupation just this quarter.
Spencer Levy
Steve, this is the moment of pitching. What are the benefits of having a third party landlord versus the occupiers owning it themselves?
Steve Skinner
I think sometimes people over-complicate it in offices thinking about, actually, what needs to be provided and actually, if you look at your office building and tomorrow you just swapped all the desks for beds and it became a hotel, nothing should change. You should already be providing all of the service, all of the hospitality, all of the amenity, all of the flexibility from everything you expect from going to a hotel. So, you should have a free-to-use gym, you should have meeting room facilities, you should have somewhere to work. Should have high quality FMB. You should have a nice roof terrace. You should have, you know, not a receptionist but a general manager. And I think that will require some expertise to deliver that experience over and above being an owner-occupier. For us, you know, we set up a fully integrated business where we're doing everything internally. Part of that is having our own asset, property, and facilities management team to make sure, you know, across 10 million square feet of offices we're delivering and providing that level of hospitality and service. And I think it's difficult on a one-off basis to build up enough knowledge and experience to deliver that.
Spencer Levy
What we're talking about now is the shift from a more static form of ownership to a more operational form of ownership. And, so, this may be the word of the year because it comes up in every episode that we're taping about how our clients are shifting from traditional to operational. Allistair, how does this operational change factor into your space decisions?
Allistair Perks
Well, my clients are primarily landowners that are seeking to dispose of their sites. So it's probably these people that we're selling land to that this question matters most to. But I think we're definitely seeing a shift in terms of all of the roster of parties that are active in developing London sites. So, Steven's business included and exactly the themes that he's just outlined. But I think we're seeing a very rapid kind of reskilling in terms of what it means to be a good landlord in London and providing these facilities and exactly as you say, Spencer, becoming more involved in the life of the building day to day. It's not just signing a 10 year lease and popping up again at the rent review and the lease expiry, it's being involved throughout that journey in terms of providing high quality services, high quality amenities um, and, um, like you say, being part of that operational journey.
Steve Skinner
Your yield on cost is so much better being, um– doing operational real estate but obviously that comes with a much larger degree of risk. If you compare the operational assets to a fixed lease asset, you know, the operational assets, again, it has the potential to provide you with significant more yield on costs and NOI and obviously you can affect that NOI yourself every, every year rather than just relying on the market by providing a great service driving – higher sales, higher occupancy, more ancillary income, etcetera, etcetera. So your ability to affect your real estate return, I think, is higher in operational assets. I think there's an argument here in the U.K. that potentially that's gone slightly the other way, that people have discounted offices so much, and actually the stability of the cash flow that offices can give, because those operational cash flows are actually trading at significantly lower yields, i.e., higher multiples, than the static cash flows, where you've got a 10-year cash flow, the rents can't go down. All of your OPEX and CAPEX is basically recoverable through a service charge. But yeah, that's trying at a much higher yield and at some point I think that will offer some value to people to go back into offices.
Simon Brown
Some investors were spooked because they believed the narrative of death of the office, which so obviously has not been the case. And I suppose to turn the table, Spencer, what are your impressions of having been in an office now in the U.K. versus what your expectations – how busy it is, how vibrant, how high quality this particular space is versus what your typical large U.S. city would be?
Spencer Levy
Sure. So, first of all, Henrietta House, where I'm sitting right now, is spectacular, though I'm sure it is equally spectacular to all of the HB Reavis spaces in the city. And the reason – what makes it spectacular is it's got not just amenities, it's the design of the space, it is designed for collaboration – has a lot of open space here, it's a lot of air and light, all the things you want. And, so, I would say my experience here has been equal or superior to the best office space I've seen in the U.S.. But the best office space isn't in New York, L.A., San Francisco, it's in sub-submarkets within each of these places. It's the combination of the fit-out, but the submarket. You can't change, or it's very difficult to change a submarket, it takes a long time. So, my experience has been positive as compared to some of the best places I've been.
Simon Brown
Yeah, I have been to some of HB Reavis's buildings and Worship Square is as good, if not better, than Henrietta House, for example. But this is pretty typical of the way that buildings are developed in London. They tend to be developed to a really high standard. In fact, I did some analysis just of the big buildings that have been developed in the last 10 years. And all of them have – we have a certification called BREEAM, it's a sustainability credential. Every single building developed over 100,000 square feet in less than 10 years has a rating of at least very good. That's, I mean, that does – that's not the be all and end all but the buildings that we have here are pretty good. People come to them. We haven't even mentioned return to work as a question now, it's finished as an argument. I think there's an argument made that because of people, so many investors being so wrong about the future of offices, that they are significantly underpriced. And if you look at CBRE's most recent European forecasts, five-year total return on average, you're looking double digit for office in the U.K., is the best performing sub-sector in our five-year forecast.
Steve Skinner
From a developer's point of view who went very long in highly sustainable well-being focused offices around 2018-19 and we delivered in those years and through COVID nearly 10 million square feet of offices. I don't worry for one minute about leasing our office buildings. That portfolio has less than 1% vacancy in office. That portfolio’s led to international and globally recognized businesses all over the world on very strong rents, great leases, um, and return to work is not really part of the conversation anymore. You know, so when it comes to filling the office building, that isn't the problem today with offices. And I think investors, you know, I think the capital markets are way behind the occupational markets. The occupational markets for, like I say, high quality, highly immunitised, really sustainable buildings are absolutely booming, but the capital markets are not looking at it at the moment and I think for the wrong reasons that they're just riding a thematic trend elsewhere.
Spencer Levy
By the way, the trend you mentioned, Simon, I looked at our own CBRE forecast is that we see office outperforming the other sectors in the near term because it's been so devalued unfairly.
Steve Skinner
Well, I mean, you know, sorry to answer your question, if you think about the future looking performance, you've got a huge amount of NOI growth to come through, and the starting cap rate is one of the highest in all prime sectors. So you've room for the cap rates to compress further, which I'm not sure is available to the same degree in the other sectors. So, when you look at your total return, add the two together, the outperformance should be there.
Simon Brown
But I think this is probably worthy of note just to make two points directly related to that. By the time this podcast comes out, that 5.75% city yield will be 5.5%. I mean, that's locked in now. So we'll be able to report some yield compression already this year. So that's a really important point to make. The other thing, again, which is really important, a lot of people maybe forget about the U.K. markets versus maybe other global markets, is that we did move yields out quite significantly. This market does react. We have higher levels of transparency here than in most other markets in the world. So when things move, they tend to move first in London because we're able to report them. And if the yields go up, it also means that they can compress as well. So, all of this spells opportunity for investors, in my opinion.
Spencer Levy
I would just like to have your wrap-up thoughts. I know this was about development, U.K. and beyond, but we focus largely on the U.K., largely on London. Let's just stick there. What's the next two, three years look like in U.K. development?
Allistair Perks
So, I think the market ahead of us looks really exciting actually, and whether that's linked as we've been discussing today, through the value opportunity in offices, which I think really exists at the moment. We're seeing upticks in terms of overseas investment allocations towards London again. We are seeing the return of larger deal sizes. So, I think there's some really exciting future steps and opportunities to participate in that rental growth that we're seeing across the board and we've talked about. So, I think that's one part of it. But as I've said, London development is about a range of sectors and a range of other things, and the kind of mix that we have in London between different types of building use, whether those are living uses, whether they're hotels, whether there's a retail, or increasingly around things like life sciences, technology we haven't talked about today. There are sort of knowledge clusters that are growing in different parts of the city, or things like education and health care. So, it's an exciting two years ahead.
Spencer Levy
Simon.
Simon Brown
I think that the point I'd like to make is that what we've seen overwhelmingly in the past 12 months in the London office market is what I would describe as normalization. We've moved on from this period of what was characterized as flight equality, where only the best quality development space was being taken. And, now, we're seeing vacancy fall driven not by lower levels of development completions, but by withdrawals of sublet availability with absorption of secondhand space and I think that this is potentially one of the consequences of what I expect to be a lower level of development completion over the next five years versus the previous five years which is the buildings. As long as they're able to offer what the tenants want in terms of amenity and location I think we're going to start to see a resurgence in activity of maybe not the C grade stock, but definitely the B plus and A minus stock. So, that's the takeaway. It's not about the development market. It's just in general about normalization of a market. Lower level of development completions, higher levels of activity within that slightly more secondary space.
Spencer Levy
And, Steve, what's your outlook?
Steve Skinner
I think if we focus on London and offices, I think the key trends which will emerge will be an increase in operational expertise needed to drive general customer satisfaction and NOI growth. I think maybe a move towards a more EBITDA type model of valuation for officers to actually reflect the customer satisfaction, and how sticky they are, rather than just focused on the length of a lease. I think rents for new well-caught, well-located assets will just continue to explode because of the lack of supply related to the amount of demand and I think you will have a significant number of regretful investors who wish they'd acquired high quality assets below replacement costs when they could, and I think you'll see an even longer list of regretful developers who wish they'd started earlier to capture all of that upside, which I think is probably coming.
Spencer Levy
On behalf of The Weekly Take, what a great conversation. I want to first thank Steve Skinner, CEO Development, HB Reavis. Great job, Steve.
Steve Skinner
Pleasure, thank you very much. Anything for you, Spencer.
Spencer Levy
Well, if that's the case. I also want to thank Simon Brown, Head of U.K. Office Research, CBRE. Terrific job, Simon.
Simon Brown
Thank you, been a pleasure.
Spencer Levy
And, then, Allistair Perks, Executive Director, Head of London Development and Asset Renewal. Terrific job.
Allistair Perks
Been a pleasure.
Spencer Levy
For related content, other global insights and archived episodes, check out our website, CBRE.com/TheWeeklyTake. Send us your feedback as well. You can do that through our website or wherever you stream the show. We're on all the major podcast platforms and encourage you to not only rate and review The Weekly Take, but to subscribe, too, and stay on top of our latest episodes. We'll be back next week with more from all across the world of commercial real estate, with a guest list featuring top minds and influential leaders from across the industry. So, stay tuned. For now, thanks for joining us. I'm Spencer Levy. Be smart. Be safe. Be well.
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