Castleforge and Malaysia's Gamuda have pressed the start button on the 500,000-square-foot reworking and extension of Deutsche Bank's former headquarters at 75 London Wall. CoStar News caught up with the project's leader to find out why the duo is so confident in the capital's offices market.
Investor Castleforge and property giant Gamuda completed the joint venture acquisition of Winchester House from China Investment Corporation China’s sovereign wealth fund for £257 million last year. Deutsche Bank had already decided to leave the 317,518-square-foot building for a new headquarters at Landsec's 21 Moorfields, so this was a clear bet on the future of London offices.
The partners bought the scheme planning to add three floors, expanding the existing eight-storey property by approximately 200,000 square feet to designs by London-based architect Orms. The building’s capacity will increase by 40% to 500,000 square feet.
They have lost no time getting a revised consent and picking Multiplex to start construction. That sets them apart in a market where developers have been shy about major office development for the past two years, in the face of a volatile economic picture, rising interest rates and concerns about the future of offices.
CoStar News can reveal JLL and Cushman & Wakefield have been appointed as letting agents and Castleforge chief Michael Kovacs confirms Multiplex started work on stripping out the space three weeks ago. Kovacs says it already has requests for proposals out on 1.5 million square feet with different occupiers.
He says the strong interest from occupiers endorses his confidence in a project.
"It's true not everyone is jazzed about offices at the moment, and neither am I in many cases," Kovacs says. "But this one is very different."
Kovacs is speaking from 99 Bishopsgate looking directly from a marketing suite towards the former Winchester House.
Critical to the new development's appeal, Kovacs says, is the ability to split the building so that there could be separate entrances for more than one large occupier.
"The building can be split with separate entrances for one 200,000-square-foot and one 300,000-square-foot occupier, or smaller ones that take up the remaining 300,000 square feet. The zones below the ground floor can be split too, to offer firms their own space for bicycles and showers and so on. We have very strong interest already from legal firms, financial firms, business services groups, major corporates."
Kovacs says there is a clear separation between the offices he is positive about and those he thinks will struggle in a world where demand has changed dramatically.
"It is not writ large that all offices can do well. In fact most probably will not. I would be very worried about a call centre-type office in a suburban city area, but so is most everybody. The tougher calls? I would also be worried about smaller, multi-tenanted offices on traditional FRI leases. Perhaps not even on the demand from tenants, but more so from investors."
Kovacs says this is partly because these occupiers need to work in the office far less than the companies he is targeting.
"There is a new normal for offices developing in London, and companies want staff back in as they are more productive in the office. Maybe it is not five days a week but it is three to four days a week. And really that fall is what we have seen over the last 30 years any way.
"Anecdotally, when you speak to agents leasing space, office occupancy has gone from 100 people needing 20,000 square feet to 100 people now needing 10,000 square feet before COVID. So it has fallen by a half in three decades, that's a 2% per year decline in space per person, and no one called for an end to office investing then. If we end up needing 20% less space as leases roll over the next decade, well then that's kind of business as usual."
What employers do need from the buildings they lease is space that employees want to be in and "nice places to work".
To that end the building promises a 200-seat auditorium, business lounge, a home for a new cultural organisation within the City of London, public realm around the building designed by Chelsea Flower Show gold-medal-winning designer, Andy Sturgeon and 20,000 square feet of landscaped terraces.
"Occupiers do ask 'what does the building do'," Kovacs says. "Yes that is amenities inside and out, but still ultimately it is also about the location. Location is the ultimate amenity and it's one that money can't fix." The development is a one-minute walk from Liverpool Street station and a five-minute walk from Moorgate and Bank stations.
For Kovacs, more than anything, a building has to eliminate the pain points of journeys for staff. "There has to be closeness to a mainline station or tube station. Flex office operators have worked this out and voted against buildings with too much of a walk from the station.
"Location is the biggest amenity. A building in an A location is obviously best. But next in the pecking order, I think if it is an A building in a B location or a B building in an A location than the latter is less likely to be empty. As an aside, the ESG-is-everything crowd would probably tell you the opposite and I think they would be wrong. What we have is the right location and the right building. Corporates are focused on amenities and proximity to clients too."
In terms of sustainability and environmental, social and corporate governance Kovacs says it is high up the agenda, a must.
In response, the building takes a "retro-first approach", which prioritises retrofit and reuse over demolition and rebuild, and the developers have proclaimed it will be an "exemplar in sustainable, low-carbon design with net-zero carbon ambition".
But Kovacs warns a focus on sustainability at all costs can lead investors and developers to overlook the vital ingredient of location.
"Occupiers want to see the logos are there, the BREAAM Outstandings, the Well Core Platinums. But some investors have been believing in new buildings that are highly sustainable without noticing they are in the wrong location. You just cannot compromise on that."
Kovacs says stripping out work began three weeks ago with construction in earnest to begin in January 2025. The projected completion date is January 2027 when there will be little of similar quality arriving in the capital.
He says he is "intellectually honest" about the risk and while he is highly confident that this positions it well with occupiers, question marks remain over the exit strategy for major office developments.
"A lot of investors are worried by a potential correlation with retail and what the sectors has seen in terms of returns but there needs to be more thesis on what is happening with offices. We have drawn up our own thesis which you can read on our website – 'only the paranoid survive'."
That is backed by Castleforge "internal research" that shows that demand for new office space will be concentrated primarily in best-in-class spaces with luxury amenities and prime locations, and in flexible office spaces which allow shorter leases and provide hospitality for small- and medium-sized companies.
That follows a recent poll of more than 1,800 office workers around the UK, commissioned by Castleforge. It also follows its own experience with its in-house flexible office operator Clockwise, which manages over 1,000 tenant relationships across the UK, Germany, Belgium and the Netherlands where the average tenant is only 600 square feet.
“That’s basically an apartment,” says Kovacs. “No one has a problem with apartment leases being a year when you have a thousand of them, but for some reason it becomes value-destructive to the Royal Insitution of Chartered Surveyors to have 1,000 one-year leases instead of having all your eggs in three to five tenant baskets who are all on three- to five-year leases. The whole way of valuing flex offices is nonsensical.”
"We find tenants are staying a shorter time in the building, a third of the time that they used to when traditional 15 to 20-year leases were typically signed for. That is not the length of the lease but the time they remain in the building. And yet now it costs more to set up a tenant in a building ultimately because rent frees have stayed the same. If as an investor you care about cashflow and are not just buying the land as if it is gold, which a private family office might do, this cannot continue.
"Especially in an environment of rising interest rates and increasing opportunity costs. There are two winners in this scenario. Either a building that can secure a 15 to 20-year cashflow stream with FRI leases to a major tenant, and that is us at 75 London Wall. Or it is a building that leans into flexible tenants. That is if you want to make the cashflow model work. But everything in the middle – which is the majority of space – there is a problem."
One positive story for major prime London offices has been the recent rent levels. There are rumours that the nearby 22 Bishopsgate is securing its final tenants at around £122.50 per square foot.
"Every conversation we are having is at £100 per square foot or more," Kovacs says. He says occupiers are particularly attracted by the clear ceiling heights at the building, a legacy of the trading floors left by Deutsche Bank.
"We have highly efficient, column-free floorplates accommodating three trading floors with floor-to-ceiling heights of 4.375 metres, and that is well suited for a flagship headquarters."
"It's another unique thing about this development," says a highly encouraged Kovacs.