2019 London Office Market Review
2019 was a significant year for the London office market, a year in which corporate uncertainty remained high. Despite this, businesses continued to commit to London office space. Here is our review of the year.
HIGH PERFORMANCE IN 2019
The London office leasing market has once space let during 2019 reaching 14.9 million sq ft. This not only represents an increase on the previous year and an increase on the long-term annual average (3% and 27% respectively), but more importantly, it highlights a level of confidence that businesses continue to have by securing an office footprint in the capital.
Our latest research shows that a final push in leasing before the year was out resulted in 3.9 million sq ft of office space being let across Q4. Whilst this figure is shy of the previous quarter, it is the third highest quarterly total in the past five years. This could suggest that businesses have set aside their uncertainties on the political and economic situation. However, in practice caution is very much prevalent when real estate decisions are taken.
SPACE CONTRACTION OR BETTER USE
Further analysis of our data shows that the number of occupiers committing to space rose to 577 in Q4, the highest number of businesses leasing space in a single quarter in over 15 years. This surpasses the most recent high of 536 in Q1 2011. Whilst this is another encouraging sign of business commitment, it does show that the average size of space leased across the year has contracted to 7,700 sq ft. This equates to an 8% reduction on the average deal size in 2018 and sinking below the 8,000 sq ft for the first time since 2012.
The decline in the average size becomes more acute when reviewing the various business sectors who have leased space in 2019. In particular, the average size of space let by the media sector was 4,730 sq ft, 53% down on the long-term average of 8,900 sq ft. Likewise, the average space taken by the technology sector has also narrowed, albeit by just 11% to 8,370 sq ft. The dominant financial sector has also been leasing less space at 10,300 sq ft, which represents an 8% drop on the long-term average.
On face value, the tightening of the average deal size could indicate a less than favourable leasing trend, yet it is worth reiterating that the number of firms taking space in 2019 has increased. The smaller average footprints could for some have been influenced by the political and economic uncertainty. Yet other factors which are at play and we believe are playing a greater role include the increase in the use of technology in the workplace, introduction of more agile working practices, or even moving certain functions out of London. These are all impacting leasing requirements and ultimately decisions.
SUPER SIZED DEALS ARE STILL HERE
The frequency of super-sized deals (over 100,000 sq ft) have remained relatively high in 2019 with 13 lettings totalling 2.3 million sq ft. This is compared to 17 such deals in the previous year, the volume of which equated to 2.9 million sq ft.
Notable deals include BT’s pre-let of 1 Braham Street, taking the entire office space of 328,065 sq ft. This transaction marks a significant shift for BT, who have resided at their current address opposite St Paul’s for close to 35 years. The move 2 miles east will provide a catalyst for greater staff engagement on the new space and enact wider business transformation. Close by in the City the technology giant, Apple has leased approximately 156,000 sq ft at
London’s newest skyscraper, 22 Bishopsgate. This is in addition to their 2016 letting of 465,000 sq ft at Battersea Power Station, where the firm is expected to move in during 2021.
The super-sized deals should not be viewed as just another corporate relocating, but as market shifters. These firms create ecosystems with like-minded companies from local amenities through to other occupiers wanting to be in proximity. Also, invariably the buildings that are leased are new developments and to achieve tenants of the calibre of Sony and Diageo, it gives a boost and drive that a scheme sometimes needs. The impact of pre-letting (or early letting) of new schemes, whether by a super-sized or mid-sized deal is now filtering through to tenant choice. Such deals accounted for 3.4 million sq ft in 2019. The third year in a row of above average level of pre-letting (2.1 m sq ft). This is leading firms of all sizes and all sectors to commence their property searches earlier, which is applying pressure on the upcoming supply pipeline.
GRADE A MOMENTUM
Whether it is existing, under construction, refurbishment or even proposed schemes, the leasing momentum for best quality stock has continued throughout 2019. Grade A space amounted to 49% of the total volume of take-up across central London, this is not just up on the previous year, but it also surpasses the long-term annual average of 43%. Accounting for 7.3 million sq ft, this is the highest volume we have recorded in our data series.
This is a level which not only suggests that tenants increasingly favour the quality spaces, it also shows that the profile of office stock across London has changed. Despite three years of above average letting of Grade A space, tenants continue to be able to secure this level of Grade A space. The question is will momentum continue, and is there enough space out there for 2020?
It’s not all about the brand spanking new space, second-hand is still the most transacted. At 7.6 million sq ft in 2019, this represents the highest volume of this grade leased since 2014. The label second-hand is an industry term, one which can sometimes be a disservice to the wide range of office space that is encompassed in this category. At the top end of this range, the quality is not too dissimilar to that of Grade A – this is increasingly being reflected in the rental level being quoted.
THE CITY, THE TENANTS CHOICE
Leasing in the City has once again achieved a new high-water mark, the total amount of office space let in 2019 reached 6.4 million sq ft, shifting out by 3% on the previous high of 2018. This represents 43% of all take-up across central London. Yet surprisingly, the number of businesses who took this space has increased significantly by 25% (on 2018) to 731 firms. We believe that the number of active firms is a good barometer to the health of the market, and like the new buildings in the City – this number has kept on rising in recent years! Not only boosting the office population but also increasing the diversity of businesses, with a growing cohort of tech firms and educational institutions now calling the City home.
Grade A space in the City office market continues to be a huge draw for tenants, with 56% of space taken being of the best quality. This also includes space that is under construction or refurbishment, which at 1.4 million sq ft is down on the historic high set in 2018 but remains above the long-term annual average by half. Lettings in 22 Bishopsgate in what is the City’s tallest building have buoyed the latest figures with close to 550,000 sq ft in 2019. The soon-to complete development dubbed a ‘vertical village’ for its plethora of amenities throughout the building, will welcome well-known brands such as Apple and Nasdaq. Other recent tenants to sign up include US law firm Cooley, insurers Verisk and meeting/event space provider Convene. One of the largest developments to commence construction back in 2016, a ‘nervy’ time for developers, is proving now to be a gamble well played by delivering into a resilient market.
MOVING EAST IN THE WEST END
In the West End, letting activity in 2019 totalled 3.8 million sq ft - down by 7% on the previous high level of 2018. Whilst not pushing the needle further like the City, the West End office market is comfortably above the long-term annual average of 3.2 million sq ft.
The North of Oxford Street submarket has recorded the most activity in 2019, accounting for 19% of the total West End take-up. This signifies a shift in the centre of gravity for leasing in this market, where in 2018 the Victoria submarket topped the list with a 22% share. In fact, areas such as King’s Cross and Paddington have equally seen a demotion in the share of leasing, down to 12% and 5% respectively. The reduction in availability levels and a limited list of schemes in which to pre-let have both influenced the location of leasing. Not all West End submarkets have recorded a drop in activity – Soho, St James’s and Knightsbridge have all seen its volume of let space increase in 2019.
STEADY PACE IN MIDTOWN
Office leasing across the Midtown market in 2019 fell to 1.8 million sq ft, down by 6% compared with the 2018 total, which itself was down on the previous year. Despite the decrease in 2019, the market is keeping a steady pace as it remains above the long-term annual average of 1.6 million sq ft. Notable transactions stem from the serviced office providers. It appears Midtown was the target last year to increase coverage as the sector accounted for 28% of the leasing. One notable deal was by the operator Uncommon who took 186,000 sq ft on High Holborn.
The Professional sector are the second biggest sector taking office space in Midtown, including DeVono Cresa client Deloitte LLP who have acquired 76,200 sq ft in 66 Shoe Lane. The deal sees the development scheme become fully let by Deloitte having already pre-let the upper floors in 2018.
TENANTS DOCKING IN DOCKLANDS
The Docklands office market experiences extreme highs and lows in letting activity from one year to the next. 2019 is one of those high years with 1.26 million sq ft and is the highest level of leasing since 2008. Albeit this record is by a whisker (4%) as 2016 was 1.21 million sq ft. Nevertheless, leasing in and around the wharf has been robust, largely due to two super-sized deals.
The European Bank of Reconstruction & Development took 360,000 sq ft on Bank Street in the first half of the year. After the summer, WeWork acquired 287,000 sq ft at 25 Churchill Place, taking the space that the European Medicines Agency had to vacate following the relocation to Amsterdam as a result of Brexit.