What a Difference a Year Makes
AVAILABILITY LEVELS TIGHTEN
Office availability across central London fell by 14% over the course of 2019, to 13.6 million sq ft. Now at its lowest level since Q4 2016, representing an availability ratio of 5.5%. The culmination of three years’ worth of robust demand has seen the amount of available office space being chipped away at, more recently with the volume of second-hand space. However, the overall total could be interpreted as still being high, but when looking at the individual submarkets there is quite clearly a squeeze in some locations, one which will impact tenant choice over the course of 2020.
In the City office market, 4.7 million sq ft was available at the end of 2019, a reduction of 17% over the course of
the year. Similarly, this level is also at its lowest level since 2016. Our analysis shows that it is the drop in second hand space that has significantly contributed to the overall picture, now at 2.8 million sq ft representing a 50% difference to the end of 2018. Bucking the downward trend is the amount of Grade A space that is available, having ticked upwards by 42% to 1.9 million sq ft.
The availability of office space in the West End at the beginning of 2020 stood at 4.9% of the market, dipping below the 5% mark, which equates to 3.3 million sq ft. This represents a decrease of available space by a third since the recent peak in Q1 2018. Like the general picture across central London, it is the movement of secondhand space that has been mainly contributing. In one year, the level has dropped by 19%, leading to a further squeeze on the choice for tenants in what was already a tightening market.
A deeper dive into the data shows that Soho, St James’s and Victoria have seen the greatest squeeze in availability levels with falls of 26%, 36% and 41% respectively. Of the eight submarkets that make up the West End, two have seen an increase in space since the end of 2018 – King’s Cross (16%) and Knightsbridge (24%).
As you have probably ascertained from the availability narrative in the West End and the City, other submarkets are equally experiencing downward pressure on the volume of available space. The Southbank and Docklands have both seen doubledigit drop in availability, with the latter now dipping just below the 2 million sq ft level for the first time since Q2 2017. The Midtown market has seen a reduction from Q3 to Q4 by 8% to 2.0 million sq ft, yet over 2019 the difference has just been 1%. Not all markets have seen a decrease and the fringe markets to the west, north and east, and have all seen an increase on the year – 11%, 8% and 4% respectively.
The reducing level of available office space across the central London market has become more pronounced in 2019. The total of 13.6 million sq ft to many people outside of the industry could seem quite a lot and give the impression of a market awash with space. However, most businesses looking for space usually have a location in mind before any search. It is then that reality of the reduced number of available spaces becomes evident. Then factor in the size requirement and the field of candidates contracts further.
The overall number of available spaces surprisingly has not changed from Q4 2018 to Q4 2019. What has shifted is the number of spaces in different size ranges. The average deal size in 2019 was 7,700 sq ft and it is the 5,000 - 9,999 sq ft range that has seen decline of 12%. However, it is the larger size ranges that have seen the greatest declines, especially the 50,000 - 99,999 sq ft range, which has seen the number of available spaces reduce by nearly half in a year. Whilst the number of spaces on the market fluctuates, our assessment of the data indicates that tenants who have current requirements for spaces between 25,000 sq ft and 100,000 sq ft will feel the squeeze more than others.
We have seen an increase of 9% in the number of spaces available sub-5,000 sq ft. At the other end of the scale, 100,000+ sq ft spaces have increased, yet despite the large percentage movement this number has only just broken into double figures.
On average, 1,500 businesses lease space across central London each year, highlighting the intensity of the competition for space. Factor in another 100 businesses who secure space ahead of construction/refurbishment completion adds further complexity for those tenants with open requirements. There is no indication that availability levels will increase significantly in 2020, in fact we expect to see further reductions. With high demand, and low supply another factor to these dynamics is a shift in rental levels – and not downwards!