This year we have witnessed a significant mismatch between the London office market sentiment and the statistics.
Central London offices
The political uncertainty surrounding Brexit has created an air of caution, however this has not translated into a slowdown of occupier interest or commitment.
In fact, the figures show an occupier market that is generally operating at levels that are slightly better than historic norms.
During the first nine months of 2018, take-up levels reached 10.8m sq ft, 16 per cent ahead of the Q1-Q3 long-term average.
Take-up so far during Q4 has reached 1.8m sq ft, bringing the annual total to date to 10.8m sq ft. If all the space currently under offer completes, annual take-up could reach 14.78 m sq ft, representing a 7 per cent increase on 2017 and 19 per cent ahead of the long-term average.
The strength in occupier demand has continued.
In the first nine months of 2018, there have been 34 transactions over 50,000 sq ft, which is already 22 per cent above the long-term average. Occupiers from the TMT, financial and public sectors, which include Facebook, Deutsche Bank and the Chinese government have dominated the largest deals that have transacted this year.
It was anticipated that we might see the number of occupier requirements fall away due to the political uncertainty; however, this has not been the case.
Total active demand at the end of Q3 2018 was 8.2m sq ft, which is 33 per cent above the long-term average. Occupiers are still committing to London and continue to pursue large office units to satisfy their requirements, but there is particular pressure on availability of units over 50,000 sq ft, with options for occupiers becoming increasingly limited.
“We see landlords holding best in class space as well-placed to negotiate stronger rents in 2019, thanks to declining supply and improving demand”
Options over 50,000 sq ft are limited outside the City Core but central London’s traditional boundaries are expanding, and commercial occupiers are increasingly footloose, with an increased number of occupiers relocating to a different submarket compared to five years ago.
Last year, 70 per cent of transactions over 50,000 sq ft moved submarkets, compared to 36 per cent five years ago. The success of locations such as White City, Stratford and Battersea are testament to this change.
Trends and challenges for 2019
We are yet to see the full implications of Brexit but with consistently strong levels of demand, coupled with downward pressure on future stock, we believe supply has now peaked.
Occupiers who are looking for sizeable units, especially new and refurbished options, will need to be open to considering other parameters outside pricing, including location and product.
As options for large occupiers are diminishing in central London, they must look to launch their office search well in advance of future lease events to maximise their negotiating leverage and chances of securing suitable accommodation, as almost 50 per cent of deals over 50,000 sq ft transact during or pre-construction.
The development pipeline for 2019 is remarkably weak at the time of writing – just 1.2m sq ft of speculative space, which is 17 per cent below average.
While refurbishments can still be delivered into this year, the window of opportunity for new-build schemes is effectively closed now.
This will push more tenants to raid the pipeline via pre-lets. Beyond 2019, there is a further 3.5m sq ft under construction, albeit 30 per cent is already committed.
We see landlords holding best in class space as well-placed to negotiate stronger rents in 2019, thanks to declining supply and improving demand.
This we see resulting in broad-based rental growth in all City submarkets, although growth is expected to be slower for rents on secondary quality space.
Occupiers’ requirements remain focused on maximising flexibility and agility against a backdrop of an uncertain political and economic outlook.
We believe landlords who are able to provide this flexibility in terms, not just lease length but also ease, speed and restricted cost of occupation and exit, are in pole position to attract and retain talent.
Victoria Shreeves is an associate at Knight Frank