Pimco has struck a multimillion-pound deal with landlord Derwent London to let office space in a newly developed block in central London, in a move that underscores companies’ desire for green, modern buildings as workers gradually return to the office.
The international asset manager has agreed to pay £11mn in annual rent over a 15-year lease on five floors in the new building at 25 Baker Street in Marylebone, which is due to be ready in 2025. The new, larger office will replace Pimco’s premises nearby.
The FTSE 250 landlord said the agreement with Pimco, which promises a building with a top environmental rating and a rooftop garden, points to high demand for desirable office locations in central parts of London.
“If you want a new building in the West End, you ain’t got much choice,” said Paul Williams, chief executive of Derwent.
However, office vacancy rates across the UK capital remained higher than normal at 8.2 per cent, Derwent said, as the industry adapts to the move to hybrid working. New buildings can command higher rents, while the majority of surplus supply comes from older properties, according to the company.
“People want better and better offices,” Williams added. “They have to be amenity-rich and sustainable, whether it’s roof terraces, climbing walls or cycle facilities.”
Colm Lauder, an analyst at Goodbody, said the market was split between resilient values for high-quality newbuilds and lagging prices for other buildings. “The London office market is not dead, it’s just highly polarised,” he added.
Landlords in the UK, and other centres worldwide, face costly new regulations to cut the energy costs of buildings, which account for 39 per cent of global energy-related carbon emissions, according to the World Green Building Council.
Research by consulting firm RSM UK last week found almost a fifth of landlords across the UK still have properties that fall below new minimum energy standards that will come into force in April, and will gradually become more stringent between now and 2030.
Energy efficiency and sustainability ratings are high priorities for companies seeking new offices, as they come under pressure to meet environmental, social and governance targets.
Asset managers such as Pimco are under particular scrutiny as they push for the companies they invest in to meet ESG criteria.
Derwent said demand for premium offices, and the deal with Pimco, helped it secure £14.7mn in new lettings this year, more than the £9.8mn it agreed in all of 2022.
“In two months, we’ve done more than the 12 months previous,” said Williams.
The company said new lettings in 2022 were 13 per cent higher than estimated rental value in December 2021, indicating robust demand.
In annual results published on Tuesday, Derwent said its underlying portfolio valuation fell 6.8 per cent to £5.3bn as of the end of last year, driven by “the weakening economy . . . [and] inflation and interest rates rising significantly”.
The London landlord’s portfolio held up better than an MSCI index tracking the capital’s office market, which dropped 11 per cent.
This article has been updated to reflect that the new office space will replace Pimco’s existing premises