Throughout 2018 our research has highlighted a growing demand for Grade A, and new office space – in other words the best-in-class buildings. The high-level of pre and early letting activity throughout last year has meant that office schemes under construction are being delivered with significant volumes of lettings already in place, limiting the choice of product for some tenants.
With a reluctance by some developers to build out speculatively, the pressure on Grade A availability has been mounting, reducing by 9% (sq ft) over the course of the year. Despite the ongoing political events and economic uncertainties that have influenced decision making thusfar, we believe that the tenant trend for this grade of space will continue and landlords and developers will need to address their development plans in order to meet those demands.
LARGE DEALS DENT TENANT CHOICE
Some high-profile transactions were announced in 2018, the largest being Facebook and the Chinese Embassy each taking over 500,000 sq ft of office space. Whilst large pre-letting and early lettings indicate success for scheme developers and also those tenants who have secured the space, it also represents another building that is off the market for others with smaller requirements. The same problem has arisen with the growth of the serviced office providers who in their quest for market dominance have let large chunks of space or entire buildings for their flexible offerings. For some tenants this limited choice of new buildings is resorting in either compromise on other spaces or the shiny, new and fully furnished serviced office offering looking more appealing. As the majority of deals transacted each year are below 10,000 sq ft, developers and landlords must be mindful of the type of space that they deliver and for who. Remembering that today’s small fintech start-up may well be tomorrow’s tech behemoth, and catering for the smaller requirement could pay dividend in the long-term.
MEETING THE MINIMUM STANDARD
An occupier’s choice of properties may also start to increase as landlords are compelled to upgrade space that doesn’t meet specific energy performance certificate ratings (EPC). From 1st April 2018 commercial properties with an EPC rating of F or G are legally no longer allowed to be leased or renewed and works should be carried out to improve the rating. Landlords of older office properties will be feeling the pressure to comply with energy legislation. The pressure will intensify as the obligations become more robust. From 1st April 2023, a mere 5 years away, the minimum energy efficiency standard will increase. Any commercial building with a rating of less than E must not continue to be let. In a market where over 50% of deals annually are second-hand, we believe that 2019 will be the year in which landlords will start to address London’s ageing stock base. Otherwise, they are at risk of falling foul of building energy performance legislation, which incurs fines and worse yet – not able to let the space.
As construction activity continues to fall and pre/early-letting trends continue, we believe that landlords and developers will start to bring forward plans for new schemes and/or refurbishments. The need for buildings to stand out and differentiate from the crowd is greater now than it has been in over a decade as tenants savviness and requirements are shaping the modern leasing market.