Central London Offices Market Snapshot Q1 2020
LONDON LEASING MARKET PUT ON ICE
Q1 2020 ended abruptly for the real estate market as the UK entered full pandemic lockdown. Social distancing measures restricted travel, closed workplaces, and for many millions, homes have become the new office. Yet, the timing of the lockdown at the end of March meant for the most part businesses continued to lease space and make real estate decisions, ensuring that activity was as close to a normal level as could be expected.
DeVono Cresa research shows that 2.7 million sq ft was leased across central London in Q1 2020, representing a drop of 30% on the level recorded in the previous quarter. Whilst this figure suggests a steep decline, it follows a period of robust leasing. That said, the latest data puts the volume of space transacted shy of the long-term quarterly average of 3.1 million sq ft, but well within the realms of Q1 totals in other years.
LEGAL SECTOR SIGN ON THE DOTTED LINE
The share of leasing by the legal sector in Q1 2020 equated to 16%, up from 5% in Q4 2019, making it the most active sector. Although, the latest data is somewhat weighted by just one deal. Global law firm Linklaters signed a pre-let in February on 310,000 sq ft at the new development, 20 Ropemaker Street. This transaction will see the company occupy the majority of the 27-storey scheme, representing a good example of a where a tenant has secured space at an early stage. So much so, they have announced that they will not occupy the space until 2026, a full three years after the building is scheduled to complete construction.
The number of future requirements stemming from this sector increased in 2019, yet only a few have resulted in signoff. Whilst the expectation is that some of these could be paused during the current situation, there are others that will need to progress. Especially those searches for firms who are looking in excess of 100,000 sq ft, an area of the market that is being squeezed where pre-letting is possibly the only option.
FLEX OPERATOR DEMAND DISSAPATES
In 2019, serviced office operators accounted for 17% of leasing. The picture in Q1 is somewhat different. It is the demand from the serviced office sector that has slumped. Over the past few years, the rapid expansion of the flexible office market has seen several operators add to their portfolio of centres quarter-on-quarter. The latest data shows that this has slowed down considerably, with its share of leasing down to just 3%.
Of those multi-centre providers, Knotel has continued their leasing spree in Q1 with two more acquisitions. Additionally, Pennine Way has also acquired two more sites. Yet it is the absence of WeWork that is noticeable in our data. This is the first time since Q1 2018 that we have not seen any leasing activity in London by WeWork in a single quarter. Whilst this is more of a consequence of recent boardroom and funding issues, the current crisis will not fuel its appetite for further expansion.
In fact, the curtailing of growth in Q1 by operators is partly derived from the inability to source the right type of space, in the right location and more importantly, at the right price. So, the slowdown in activity may well have come at a perfect juncture as the current pandemic looks set to test the sectors resilience in difficult times.
NEW ‘FINANCIAL’ KIDS ON THE BLOCK
The financial sector is still up there as a driving force in office take-up, accounting for a 14% share of leasing in Q1. Demand from boutique investment firms and overseas banks alike continued to bolster their base in London. A resurgence in optimism at the end of 2019 ensured that this sector continued leasing, despite Brexit still at the forefront of most financial firms’ strategies.
Of the businesses that have committed to office space across London, we have started to see a new generation of firms, such as Tide Banking, leasing bigger spaces. The business, which is only 4 years old, has taken 23,000 sq ft in the City. They join a growing number of business that have benefitted from the growth of online banking, lending and investment. Whilst most are not your typical financial firm, their fast growth, both in terms of customers and staff size, have seen them become a key part of the office community in London. This is especially apparent in the City, alongside relative ‘old-timers’ like finnCap who have taken 19,600 sq ft at Helical’s 1 Bartholomew scheme.
During the last major economic crisis – the Global Financial Crisis (GFC) of 2008-09 – the financial industry was in the eye of the storm. This time round they are impacted in similar ways to other sectors. Yet, the subsequent changes financial firms made to their operations and real estate footprint could serve them well today.
TECH AT THE TOP
In 2019, the share of leasing of office space by technology firms decreased in comparison to other sectors. Whilst the volume of space taken in Q1 shows that this has continued, the share of leasing equates to 15.5%. However, this is largely a result of just one firm, Google. The global tech firm took circa, 182,000 sq ft across three buildings in Q1. The largest of which was short-term space at Euston Tower on Euston Road. Not to discount these deals, but without them it does clearly point to a downward trend of leasehold acquisition by technology firms as we have previously stated.
The use of (for some) new technologies have been a lifeline for businesses throughout the early stages of the pandemic lockdown. A rapid adoption of home-working and the need to operate ‘normally’ has led to an exponential
increase in the use of new software, new functionalities and new working practices. This has not only elevated the IT department in most companies but has also brought technology firms and their products to the fore. Not least of all, video conferencing providers. Whilst growth for these businesses will not immediately translate into increased office floorspace requirement; it will breed a new cohort of businesses that will occupy space in London.
SPOTLIGHT ON MEDIA
The number of media firms leasing space jumped from 40 in Q4 2019 to 50 in Q1 2020. This rise has translated into an increase in the share of leasing by this sector to 12% from 4%, across the same period. DeVono Cresa has supported clients – Breakthrough Media and Cineflix – during Q1 to secure space in the Southbank and Midtown, respectively. The firm to take largest space was global media agency, IPGMediabrands. This multi-discipline business has taken 93,000 sq ft at the refurbished 16 Old Bailey, EC4. They will be joined by serviced office operator Knotel in this new space.
The level of real estate commitment by the media industry comes at a time when traditional media/broadcasters such as Channel 4, BBC and ITV are bolstering their footprint around the UK. Yet, it is the digital side of the sector that is fuelling growth, which coincidentally in these current times of lockdown is being consumed more than ever. Whether it is digital marketing, online streaming of music and television, or even the production capability for these services, London continues to be a global hub.