Estimates of job cuts in the City are increasing week by week (and have now started). This is no surprise. Financial institutions have always viewed staff as a liquid commodity and as the easiest overhead to cut when the going gets tough.
This article points out one implication for the commercial property market: that of empty office space. However, whether this will lead directly to a ‘ plunge in property rents ‘ is rather uncertain. That depends if the job losses are as a result of company failures (which would lead to empty non-revenue producing space that landlords would be keen to re-let as soon as possible) and on the strategies of surviving organisations.
They will (in most cases) still be left with the obligation to pay rent, whether they occupy the office space or not. Space rationalisation can sometimes be an expensive proposition, so if the organisations expect an improvement in market conditions that may lead to them hiring new staff within a year or so, some will judge it prudent not to seek to sub-let the space. There are undoubted efficiencies from contiguous occupation and breaking up such hard-fought for continuity can cause problems in the future. Sub-letting a couple of empty floors in a building you occupy may mean that future expansion will have to take place in separate buildings, reversing a trend that financial institutions in the City have been striving for a long time: to get everyone under the same roof.
Of course, there could be a flurry of mergers and takeovers that might lead to whole buildings being put up for let. However, in the current climate of fear, uncertainty and lack of available credit, I would be surprised to see this happen.
So I would not expect a ‘ plunge in rents ‘, but anticipate a decline. The impact of City job losses on the commercial property market concerns me for other reasons altogether.
In the early ’90s, initially the attitude of many banks’ towards troubled loans was generally supportive. In particular, one of the High Street banks was notable for this. However, it suddenly changed its policy. Receivers and liquidators were appointed to take control of many of their customers. Another bout of doubt hit the commercial property market, values fell further as some of the appointees sought to sell assets quickly and other banks found it convenient to follow suit.
I thought I knew why this had happened and had an informal meeting with some of the bank’s lending team, which confirmed my worst suspicions: they were overwhelmed with work. Troubled loans take more time administrating than putting on new business (contrary to general belief in the lending world). This, coupled with the fact that banks earn far less from restructuring loans than granting new ones, made the choice inevitable – appoint a receiver to do the work, whose costs are proportionately borne more by the borrower’s unsecured creditors.
The obvious suggestion was to take on more staff – there were plenty of suitable staff available following cuts elsewhere and it could be done on short-term contracts – but this was deemed unacceptable ‘ for security reasons ‘. Cynics might say such an approach would show few benefits for banks and neither they nor their shareholders care about that much about lending losses in the longer term.
Another aspect of concern is job cuts in lending teams, which can see troubled loan portfolios handed over to a ‘ debt recovery ‘ team who have little to gain from supporting customers in difficulties. In fact, in the last recession, we were disappointed to have representatives of a High Street bank’s debt recovery team attend a meeting of various borrowers for a troubled company. Not surprisingly, they led the demands for liquidators to be appointed and when there was clear disquiet at this approach in the room, their senior representative – and I’ve always admired his frankness – said “What else do you expect us to do ? Why should we risk our jobs by voting to support the company for another year or two, only to have it then fold with bigger losses ?”.
Disturbing times indeed. Not surprisingly, I’m also concerned about the loss of skills and experience, having seen it happen before. However, I have to acknowledge this is essential for recovery and another boom: fresh meat without burns from the past is the staple diet of financial institutions when rehiring.
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