The UK is reopening for business. London may never be the same

Underground journeys for the month of March tumbled 43% from the 106 million recorded in February, and plunged even further in April, during the height of lockdown, to just 5.7 million. Social distancing rules mean the Tube can only handle up to 15% of its normal traffic, according to London's mayor, Sadiq Khan.

The fallout from lockdown has been severe. London's economy is expected to contract nearly 17% this year, according to figures from the city government, a sharper drop than the 14% decline the Bank of England expects for the United Kingdom as a whole.

Companies in London are expected to shed some 460,000 jobs, or about 7% of the workforce, with manufacturing, construction, retail, and accommodation and food services the hardest hit. Employment is not expected to fully recover until 2022.

With transportation severely constrained, and a potential coronavirus vaccine still many months away, the people and companies that have made London into a hub for real estate, finance, the arts, hospitality and technology are desperately trying to reinvent themselves in hopes of surviving the pandemic.

One sign of progress: pubs, restaurants and hair salons can reopen on Saturday, provided they follow social distancing guidelines.

The physical city

What the pandemic means for London's sprawling collection of corporate headquarters is still unclear. Paul Cheshire, professor of economic geography at the London School of Economics, is quick to dismiss the suggestion that the office is dead as "nonsense," arguing that what happens in the long term will be less dramatic.

More people will spend more time working from home, or in decentralized office spaces, but this won't abolish companies' demand for locations in the city center, which have been shown to increase productivity and facilitate idea sharing, he said.

What happens to real estate, which accounts for 15% of London's economy, matters a great deal to the city.

The government has protected commercial tenants from eviction through August, but those measures will at some point expire. According to property management platform, Re-Leased, just 45% of commercial rents for the third quarter had been paid by early July. But that was an improvement on the previous three months and "a sign of the capital's resilience," said Re-Leased CEO, Tom Wallace.

The pandemic has accelerated existing trends around agile working and the desire for more flexible office space, where several different companies share meeting and social areas, as well as facilities such as showers, bike racks and kitchens.

Companies "want their offices to count," said Darren Richards, head of real estate at British Land, a leading UK property company. He predicts that greater numbers of older offices in need of refurbishment will likely be released onto the market in the future, as companies prioritize higher quality spaces.

British Land, which owns 7.1 million square feet of commercial real estate in areas like Broadgate, Paddington, Mayfair and Regent's Place, said that currently its tenants are not seeking to get rid of office space. Businesses still "want space fundamentally," though they are contemplating how much and for what purpose, Richards said.

Still, the penetration of online shopping during the coronavirus will mean a reduction in brick-and-mortar outlets, which could radically alter the landscape of London's vast retail space and create yet more uncertainty for the city's real estate market. "What would have happened over five years is happening over months," said Richards.

The City, reinvented

London's financial heart, referred to as the City of London, has a proven track record of reinvention.

Storied institutions like Lloyd's of London, the Bank of England and the London Stock Exchange have been around for centuries, withstanding radical social, political and economic turmoil.

Today, the City is home to well over 250 international banks and handles 43% of global foreign exchange trading, according to the Bank for International Settlements. Financial services contributed £65 billion ($81 billion) to the London economy in 2018, or about 15%, figures from City Hall show.

And despite four years of uncertainty over Brexit, the United Kingdom has been Europe's top location for international financial services investment over the past two decades, with London claiming the bulk of those flows.

"London's dominance as the preeminent European financial center remains unrivaled," said Omar Ali, EY's UK financial services managing partner.

UK financial services will continue to be a leading recipient of overseas investment even after the pandemic, according to an EY survey conducted in April.

Investors ranked the availability of capital as the most important consideration influencing their future location choices, followed by safety and security measures introduced to prevent a future major crisis, whether that relates to health, the environment or cyber security.

There are factors working against the City, however. The UK government's handling of the coronavirus crisis has been widely criticized, and business and consumer confidence remains depressed.

"We failed to take advantage of the fact that we're an island and didn't move fast enough. There was a lot of complacency and hubris," said Richard Burge, the CEO of the London Chamber of Commerce and Industry.

The government's approach to negotiating its post-Brexit trading relationship with the European Union has also drawn reproach. A group of business leaders warned this week that Britain's decision not to extend the current transition period beyond the end of the year is a "huge gamble."

The City of London may yet be tested. Crucially, there is currently no guarantee that UK financial firms will retain access to the European Union after this year — an export market worth £26 billion ($32.4 billion) in 2018, according to the Office for National Statistics, or 40% of the sector's total value.

Still good for startups

As London seeks to retain its status as a leading global business center, the city's technology sector, which boomed following the global financial crisis, could help.

Google, (GOOGL) Facebook (FB) and Amazon (AMZN) have big offices in London, and startup investment has continued during the pandemic, suggesting that losses in real estate and financial services could be made up in the tech sector. Startups based in London have raised $4 billion in venture capital since the start of the year, more than Paris, Stockholm, Berlin and Tel Aviv combined, according to figures compiled in June by Tech Nation and Dealroom.

"It's a global arms race but London is still ahead," said Brent Hoberman, the co-founder of Founders Factory, an accelerator. "I think London absolutely remains as the global magnet for tech talent," he added, attributing its attractiveness to world class educational institutions, diverse culture and early entrepreneur success stories.

Lockdowns have only accelerated the adoption of digital technologies in everyday life, and boosted information and health technology companies, playing to London's strengths, said Suranga Chandratillake, a partner at Balderton Capital, one of Europe's leading early stage venture capital investors with stakes in companies such as Citymapper, Vivino, Lyst and Revolut.

The city is home to a large share of digital consumer businesses, Chandratillake said, including online grocer Ocado, digital banks such as Revolut and Monzo, and food delivery companies such as Deliveroo and Gousto.

London also boasts an outsized share of technology companies in areas such as cyber security and workforce management, now servicing armies of home workers. And the coronavirus has boosted investment into health technology, benefiting London and the United Kingdom more broadly.

"The city is the most genetically diverse in the world, almost all citizens use the same health system and there are a variety of tech projects, both government-funded within the NHS [National Health Service] and privately-funded startups, that have grown rapidly against this backdrop and stand in a very strong position," Chandratillake told CNN Business.

The pandemic could even help to catalyze new ways of doing business. London & Partners, the trade and investment body for London, said it recently organized a trade mission via Zoom (ZM), where a group of human resources tech entrepreneurs pitched their businesses to potential investors and customers in New York.

"If we assume a reduction in travel, it points towards naturally digital sectors in which London has existing strengths," said managing director of strategy and corporate affairs, Allen Simpson.

Saving London's culture

While London's tech and finance sectors look set to weather the current crisis, social distancing and a reduction in travel spells disaster for its once booming arts and culture scene, which helps attract tourists, ambitious young professionals and investment. For theaters, museums, restaurants and bars, it's an existential threat.

Leisure and hospitality "really strategically matter," said Simpson. "People come from all over the world partly because London is a cool place to live."

Nearly 40% of Londoners are born outside the United Kingdom, making London one of the most cosmopolitan cities in the world. It is home to 1 million EU nationals and was the world's third most visited city in 2018, narrowly behind Paris and Bangkok, according to Mastercard.

Last year, London boasted 21.7 million overseas visitors who spent £15.7 billion ($19.6 billion) on the local economy and supported 250,000 jobs, according to the Office for National Statistics.

"That revenue keeps certain things alive in London," said UK Tourism Alliance director Kurt Janson. "The West End theaters couldn't survive if not for overseas visitors."

In an open letter to the government signed by UK Theatre and nearly 100 actors, writers and directors, the Society of London Theatre worried that "British theatre is on the brink of ruin."

"Theatres do not have the money to operate viably with physical distancing," they said. The industry has called for an emergency relief fund, ongoing wage support and more help for freelancers and self-employed artists.

Museums, galleries and London's iconic tourist attractions are also at risk. Several have not yet announced plans to reopen, despite being allowed to do so on Saturday. In a joint statement issued late last month, directors of museums such as the Tate, British Museum and National Gallery said it was a question of "how and when we can open our doors again in a financially sustainable manner, for the long term."

The National Gallery has said it will reopen on July 8, while the Tate Britain and Tate Modern will reopen on July 27 and the Tower of London on July 10.

London's pubs and restaurants face an even greater threat from social distancing.

Already, Michelin-starred Texture and the upmarket Indian Accent, a Mayfair outpost of the Delhi original, have permanently closed. They are unlikely to be the only casualties.

Murat Kilic, the owner of Amber, in the hip East Aldgate neighborhood, told CNN Business that he is not confident about reopening. Amber is opening its doors on Saturday for the first time in nearly four months, but at less than half its previous capacity.

Kilic worries that when government support is wound down in October, he could risk eviction unless his landlord agrees to temporarily reduce monthly rent payments.

For Joseph Ryan, business looks set to boom over the July 4 weekend at his two pubs in London. Howl at the Moon and The White Hart have far more bookings than usual, Ryan said, but he is less optimistic about the longer term outlook.

Indoor capacity has been cut in half, seating is now mandatory, wooden panels have been erected between tables, and staff will be wearing masks and gloves.

"We're confident about this weekend, but thereafter we're not so sure," said Ryan. "The novelty might wear off."

Whether Londoners are quick to return to bars and eateries remains to be seen. Worryingly, household income and expenditure are set to tumble by 5.5% and 12% respectively this year, and are not expected to reach 2019 levels before at least 2023, according to City Hall.

How quickly a new London emerges depends on the coronavirus: if cases continue to fall and social distancing is eased further, the economic outlook will brighten. A second wave could prompt further lockdowns and all the economic pain that brings.

London will find "workarounds" to the immediate challenges posed by the virus, said Burge of the London Chamber, from becoming a city of cyclists and walkers to standing outside bars in the drizzle. "That's what we do," he said. "London will come through."

— Eoin McSweeney contributed reporting.