As a result of the slower pace of demand in Q1 2020, the downward trend in the level of office availability across central London has halted in its tracks. Now at 13.8 million sq ft, this equates to a small rise of 2% on the level recorded at the end of 2019. The direction of travel that office availability has taken was not expected at the start of the year, or even mid-way through the quarter. Then again, most things that we are now doing were not expected.
Availability in the core market of the City increased by 5% in Q1, returning it to a similar level to that of Q3 2019, at 4.9 million sq ft. This was mainly a result of an increase in secondhand space.
However, the market also experienced a reduction in the volume of available Grade A space, now down to just 1.5 million sq ft. Whilst the latter would have been boosted by several development schemes scheduled to complete in the first half of this year, a pause on construction will see some completions move out later into 2020 or even 2021. One such scheme that may have a delay to its completion is the 60 storey, 22 Bishopsgate, due to welcome new tenants in Q2 2020. This building or its previous design incarnations have been in the planning for 15 years.
Having succumbed to economic crises before, we are sure that this final hurdle will not get in the way.
A rise in availability on the Southbank has taken the volume of office space above the 1 million sq ft level for the first time since 2018. The relative size of this market compared to its neighbours north of the river means that fluctuations in availability are more pronounced. The 45% increase in available office space has like central London, in general, has been fuelled by a rise in secondhand space.
The uptick in availability is not quite shared across the various markets across central London. In the Docklands and the West End the volume of available office space declined by 5% and 13% respectively. Although these are not significant shifts, they do highlight the continued squeeze on the choice that occupiers were experiencing. In the West End this is further compounded by the average size of available space which reduced from 4,920 sq ft to 3,550 sq ft. This contraction of the average size of space limits both the number and size of firms.
Although these are not significant shifts, they do highlight the continued squeeze onchoice that occupiers were experiencing. In the West End this is further compounded by the average size of available space which reduced from 4,920 sq ft to 3,550 sq ft. This contraction of average size of space limits both the number and size of firms wishing to take space in this market.
The current ‘on hold’ situation that the real estate industry finds itself in is artificially masking the direction availability levels will take for the remainder of the year. The closure of offices, the inability to view space in person or even the appetite to want to view, is not akin to any downturn that we have seen in recent times. Whilst a reduction in construction on a site-by-site basis has been seen before, the complete shutdown of industry alongside its supply chain is new. Both these factors will have an impact on demand and choice, which in turn will influence the volume of available office space.
Yet, it is the ‘market churn’ of office space that will in the first instance start to contribute towards availability levels. Businesses returning their old space to the landlord, having recently committed to new premises, will add to a growing volume of available space – especially if demand is muted. Secondly, businesses who need to contract their real estate footprint, could well go down the sublease, assignment or even surrender route. All of which will fuel the upward movement of availability across London.
Trying to ascertain the impact on the office leasing market in these early days is no clear science and any historical references are based on periods in time that commenced with an economic crash and not the pandemic lockdown that we have today. If we refer to the Global Financial Crisis (GFC), the greatest rise in availability came mid-way through in Q1 2009. The level of available space increased by 20% in a single quarter. On average across the two-year period the level of availability rose by 9% per quarter.
The most recent EU referendum campaign and result led to volatility in the office leasing market. It was in Q2 2016 when the referendum result was announced that led to a 12% increase in availability. However, volatility settled down and the level at the end of 2016 was back at the same level as at the start of 2015.
In ‘normal’ times when availability levels increase, it will play in the favour of the occupier – giving an increased choice of spaces and higher negotiating power with landlords. However, as the market has effectively been put on ice, the market fundamentals remain the same. Until the market resumes and businesses progress their decisions, the period of hiatus in the leasing market continues. It is over the next six months that we will start to see how the trajectory for demand and supply is formed.