CITY LEASING KEEPS AVERAGE PACE
Notwithstanding the overall fall in leasing activity across central London, the space transacted in the City office market totalled 1.3 million sq ft in Q1 2020, keeping a pace with the long-term quarterly average. In fact, surpassing it by 4%. Tenant attraction to City office buildings has been consistent in recent years, with the latest quarter accounting for 48% of all leasing.
However, despite the relatively strong showing, the quarterly transaction volume for The City is at its lowest level since Q1 2018. And, with just approximately 500,000 sq ft of space identified as being under offer, expectations for Q2 to match the longterm trend are slim. In the past ten years, the lowest quarterly level of office leasing in the City was 607,000 sq ft in Q3 2016, post the Brexit referendum. Whilst the Brexit demand dip was short-lived, the latest situation is likely to last longer, with the impact on demand remaining uncertain.
DEMAND DIPS IN WEST END AND MIDTOWN
Leasing activity across the West End and Midtown is lower than the long-term average level, by 12% and 48% respectively. Whilst the West End has not fallen short of its most recent historic low; this cannot be said for Midtown. The total volume of takeup in the third-largest London office market was 222,000 sq ft, which is the lowest quarterly level since 2013, and marginally below the level recorded during the Brexit referendum.
In the West End, the northern submarkets of North of Oxford Street and King’s Cross/Euston accounted for over half of the leasing in Q1 2020. In the more traditional areas of Mayfair and St James’s demand equated to 29% of overall West End leasing activity. Even if the final month of Q1 was not disrupted and the market operated under normal circumstances, the reduced level of supply and increased rents will have certainly continued to affect the volume of demand for both markets.
HEALTHY DEMAND FOR SOUTHBANK
Under supply of good quality office stock in the Southbank market has subdued demand for this area of London in recent quarters. However, our research shows that leasing activity increased in Q1 2020 by 12% on the previous quarter - the only core market to do so. This increase ensured that it matches the long-term quarterly average. Encouragingly, the latest data was not a result of an increase in the number of tenants, but a rise in the average size of space leased by 37% to 4,816 sq ft.
A SHIFT IN SIZE AND QUALITY
The average deal size in Q1 2020 across all central London submarkets was 27% below the long-term average. This represents a decrease of over 2,100 sq ft in the size of transactions. Whilst this calculation is based on the comparison of just one quarter; we have previously highlighted a downward trend in deal sizes. These latest figures indicate that this has continued and is likely to do so.
It is worth pointing out that whilst the average size of a deal has reduced, 58% of space leased in Q1 was in excess of 10,000 sq ft. Those large deals have not gone away with three sized over 100,000 sq ft.
Secondhand space was the flavour of the quarter, as 59% of the space leased was in this category. This is up on the 50% recorded in Q4 2019 and up on the 51% share of 2019 leasing. Whilst the range of secondhand space varies considerably, market conditions (supply & price) have been forcing tenants slowly towards this type of space rather than the brand new.
The size, shape and indeed, the quality of an office will come under scrutiny over the coming months as a result of the economic uncertainty and social distancing measures. There are different schools of thought as to what COVID-19 could mean for the office and the way we work. Some suggest a decrease in space needs following the success of remote working; others believe that keeping distances within the office could increase requirements. As both could be relevant for different types and sizes of businesses, the onus will be on landlords and tenants to undertake space and scenario planning and provide the right type of space that meets business need.
Our leasing data points to a level of positivity and confidence that businesses still held at the beginning of the year; confidence that translated into office leasing. But the dramatic shift in the economic landscape eroded this almost overnight. The latest consumer confidence index by GfK points to the largest singlemonth dip since the survey began in 1974, down to -34 points. Similarly, the IHS Markit/CIPS UK manufacturing purchasing managers index (PMI) recorded its sharpest reduction in business optimism to a series low as disruption from the lockdown took hold. This will no doubt filter through into businesses appetite for real estate and impact leasing activity in Q2 and the rest of the year.