The central London office market felt the full effect of the government lockdown measures in Q2 2020, Expectations of office demand in this period were low, as the priority for businesses was on survival and navigating through unchartered territory.
Our latest research shows that while the direction of travel for office demand, availability, and rents has indeed gone the way most had envisaged, the pace has been a little more subdued despite the circumstances.
LEASING IN LOCKDOWN
Leasing of office space across central London in Q2 2020 totalled 1.2 million sq ft representing a drop of 57% on the previous quarter. This is 68% lower than in Q2 2019. The remarkable thing is that this total is not the lowest quarterly level of take-up, this continues to be Q1 2009, at the time of the Global Financial Crisis (921,000 sq ft). While not far off the low point, the latest data shows that businesses have not retrenched as much as they did in 2009.
Our data for Q2 2020 brings the total volume of office space leased for the first half of 2020 to 3.9 million sq ft, which is 43% down on H1 2019. Comparing this with the long-term first half-yearly average, the gap narrows with take-up down by a third (33%). Considering that there have been only two full months of ‘normal’ trading at the start of the year, this is surprisingly resilient.
However, we are not blind to think that all is rosy; these figures are stark. Businesses are not only contending with the continued unpredictability of the pandemic and the issues that ensue but a deepening economic downturn and a re-evaluation of the workplace and workforce – all of which will impact the office market.
MISSING IN ACTION – SME LEASING RELUCTANCE
Despite the lower level of leasing activity in Q2 2020, the average deal size across central London increased not only on the previous quarter but on the long-term average. The average deal size in Q2 2020 was 8,160 sq ft, which is up on the 5,785 sq ft in Q1 2020 and 7,700 sq ft for 2019. This was a result of more financially stable firms willing to commit to larger spaces during this unstable period. But more importantly, the latest data highlights the significant reduction in the number of smaller firms leasing during the current crisis.
Some of those larger firms who leased space in Q2 2020 include BP, who took 205,000 sq ft at Cargo, 25 North Colonnade in the Docklands; this is despite press articles stating that the firm is now considering reducing its portfolio by half.
Law firm Covington & Burling who are currently based in Holborn have signed for 86,000 sq ft of tower space at 22 Bishopsgate in the City. In the West End, Exane BNP Paribas has pre-let 38,000 sq ft at the new development at 1 Newman Street, which fronts Oxford Street. Whilst these and other large firms will continue with operations in London, the office market and wider economy are fuelled by the small to medium-sized firms who at present are reluctant to progress with making long-term decisions.
But will we start to see the average size of deal reduce? A number of survey results have been released in recent months, trying to ascertain how the pandemic has affected business and associated property needs. One such survey of 500 businesses by Accumulate Capital shows that 73% of decision-makers believe that the pandemic will result in downsizing to smaller offices, with a third (37%) of themselves planning to do so. Whilst this may be an accurate reflection of business intentions, the logistics of doing so will not be so simple for some firms which are tied into leases in the short-to-medium-term. What may be happening is we are on the cusp of seeing the start of the repurposing of existing space with a longer-term view of repositioning the office within organisations.
Over the past couple of years, the flight to quality office space has driven leasing activity and became a firm trend with occupiers. Even leasing during the lockdown, businesses who have committed to space have chosen Grade A space either under development or existing, to the tune of 55% of the total leased. Although some costconscious firms will opt for good quality second-hand space, there will be others who will continue to have their eye on the shiny and new.
In our market snapshot of Q1 2020, we commented on how a reduction in demand could increase the range of options open to occupiers with active requirements. While availability has indeed increased over the quarter, it has done so with second-hand space and only a marginal movement in Grade A. Therefore, in some areas of central London we could see a squeeze in the supply of top-quality office stock.
However, in some cases, the limits on choice are exacerbated by the initial marketing strategies of new office schemes where a single or majority occupier is sought, rather than multi-let. This is a stance that may well have to change, as the market faces unpredictability and occupiers dial down on the size of their requirements – developers may not be able to be too choosy.
WHICH SECTORS WERE LEASING IN Q2?
The full range of London’s occupier base has been active, albeit in smaller numbers. Like most quarters the cross section of active occupiers in Q2 2020 has been varied; however, three business sectors have fuelled leasing activity:
corporate, financial and technology, together they account for 74% of space transacted.
A look back at data covering the Global Financial Crisis (GFC), in Q1 2009, the low point for leasing activity, the corporate and financial sectors were the most active, despite the turbulent backdrop. So, it should be no surprise that these stalwart sectors of the London office market have continued in a similar vein to previous downturns. However, today they are joined by businesses from the burgeoning technology sector, who have grown their significant base within London following the GFC.
The corporate sector, with a 27% share of deals activity, has led the leasing charge in Q2 2020. This is largely as a result of BP taking 205,000 sq ft of space at the redeveloped 25 North Colonnade in the Docklands. The building renamed Cargo (a nod to the Docklands heritage) is expected to replace BP’s existing space at 20 Canada Square, where its lease is due to expire in 2024.
Other corporate occupiers securing space include fashion retailer BooHoo who signed for approximately 9,900 sq ft of second-hand space at Euston Tower. This is in addition to the 11,000 sq ft it already leased in the same building.
The corporate sector, which includes a range of firms from retailers to holding groups, whilst maintaining a constant in leasing activity across central London, it could well be the sector that adjusts its property footprint more as a result of economic conditions than most. Fluctuations in share prices, consolidation of operations, and significant adjustments to working practices will see businesses in this sector evaluate all areas of expenditure and working. This could result in a reduction of floorspace but their actions could also pioneer the working evolution in London.
INVESTING IN THE FUTURE
The financial sector, the largest occupier type across Central London, continues to consolidate its presence, with 24% of leasing in Q2 2020. However, the noticeable difference has not just been the reduction in leasing volumes but the type of financial firms that have remained active and the location of transactions.
Private equity and investment houses have accounted for 90% of the leasing activity by the financial sector in Q2. Whilst the size of deals by these firms are generally smaller than their banking counterparts, their contribution to the
financial ecosystem within London is just as equitable – opting for highernet worth locations and prestigious addresses. This has meant that the focus of leasing activity for the sector has shifted from the City to the West End.
The West End accounted for 52% of leasing by financial firms, this was followed by 19% in the Southbank office market, in contrast to just 16% share for the City and 0% in the Docklands. This highlights the dependency that these markets have on banks, both domestic and overseas, stockbrokers, and financial services firms to occupy space.
Our research shows that historically the financial sector has adapted to change as a result of economic downturns and adjusted its real estate footprint accordingly. With announcements of working from home policies extended to 2021 or even made permanent by large banks, and a shift working practices in institutions such as the Bank of England or even Lloyd’s of London, could we be seeing a changing face of the financial sector?
TECHNOLOGY FIRMS NOT JUST IN THE CLOUD
One would assume that of all the sectors that could and would embrace working remotely, it would be the technology sector. Not just yet, as the sector accounted for 23% of leasing in Q2. This shows a continuation of commitment by technology firms to London, in what has become a global hub of innovation, talent, and entrepreneurship throughout the past decade.
The largest deal in Q2 2020 was by Roxor Gaming who took 60,000 sq ft at 25 Golden Square in Soho. This deal is second only in size to the short-term space that Google acquired at the start of the year.
Whilst the technology sector is more suited to greater flexible working practices, and thus, a reliance on physical office space could be reduced, the sector is more in tune with what an office space can provide than most others – and that is more than just a desk. The ability to provide space to collaborate, work independently, socialise, and entertain clients have all become a key part of the tech office offering. Young people are feared to have adapted less to the change in circumstances due to the pandemic than most, as such businesses will use all the tools they have – including the office to retain and attract talent.