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TENANTS LURED
TO THE SHINY AND NEW

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Central London Office Market Q3 2018

The latest research from DeVono Cresa shows that Q3 2018 has been another solid quarter for leasing activity across central London. It is apparent that whilst Brexit has dominated TV airtime and copious column inches with talk of deals and no-deals, trade wars, political infighting and much to-ing and fro-ing, businesses in London have got on with making real estate plans regardless. For a growing number of those firms, they have been lured to the best-in-class office buildings that London has to offer.

Whilst the majority of space transacted in 2018, so far, has been second-hand space (5 million sq ft), it is close to being matched (4.5 million sq ft) by the strong demand to take brand new space, especially that which is either proposed or under construction. Nearly a third (29%) of the total leased this year has been pre-let/early-let, significantly up on the 19% seen for the same period in 2016. Whilst the choice for tenants has for the past two years been supported by the delivery of the highest number of new buildings for over a decade. The growing demand for this type of space is now impacting tenant searches and choice, making pre-letting inevitable for some, especially as some developers are still cautious with starting speculative schemes. However, those who have been successful in securing new space are doing so in some of the newest buildings in London.
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Summer heats up London office market

Significant tenant demand for central London office space across the summer months has resulted in Q3 take-up totalling just over 2.8 million sq ft (in line with the long-term quarterly average). This now takes the total leased in 2018 to 9.5 million sq ft, on a par with that recorded for the same period in 2017. Hence the solid volume of leasing deals that have been transacted this year.

2018 is turning out to be a year of super-sized deals, no sooner have we reported on the 589,000 sq ft taken by the Chinese Embassy at the Royal Mint Court scheme, then along comes Facebook’s agreement to pre-let 600,000 sq ft at the King’s Cross Central development. This was not only the largest deal of Q3, but is now largest deal since 2013 when the other technology giant Google acquired their own King’s Cross site (now under construction).

The Facebook deal will see the firm double its current floorspace, enough to house 6,000 workers as London becomes its biggest engineering hub outside of the US. It is no surprise that this deal is being feted as a sign of international commitment to London and the UK.

A number of other significant (100,000 sq ft plus) lease agreements have been announced in Q3, including 131,000 sq ft by co-working providers WeWork at Aviation House, Kingsway and our very own client Investec Asset Management taking 121,500 sq ft at 55 Gresham Street. This new building developed by Angelo Gordon and Beltane Asset Management

is due to complete in November 2018 and will be its new HQ, highlighting the firm’s commitment to London as a global financial hub.

Robust demand has also been noted in submarkets that currently do not feature in our central London definition. Global advertising and public relations firm Publicis have agreed to lease 212,000 sq ft at White City Place, W12, consolidating six of their brands into 2 Television Centre.

Over at the Queen Elizabeth Olympic Park, the Victoria & Albert Museum has taken 145,000 sq ft at the Here East, E20 scheme to house offices and a research centre. Giving a further boost to this emerging area.

Looking a little closer at take-up in the submarkets, it has been a mixed-bag in Q3. Leasing was up by 11% in Midtown with 457,000 transacted in Q3, driven by large deals in the Holborn and Farringdon areas of the market. Whereas in the City, leasing was down by 48% on the previous quarter, despite over 1 million sq ft being leased (which is in-line with the long-term average). Yet, the quarterly take-up level for the Docklands has seen a rise of 20% on Q2 figures to reach 166,000 sq ft. This was largely as a result of the Competition & Markets Authority relocating eastwards from its current Midtown home to the Docklands taking a lease of 112,500 sq ft at 25 Cabot Square.

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Further dip in available office space

The volume of available office space across central London has fallen for a third quarter in a row, the total now stands at 15.4 million sq ft. This represents a fall of 3% from Q2 to Q3. Now at the same level as recorded back in Q2 2017. Despite the most recent fall, the total volume available still indicates that there is plenty of space out there!

Over the past quarter we have recorded a further drop in availability levels in the City with the ratio now at 6.5%. Looking at the markets more closely we see that the Southbank and Midtown markets have seen a relatively pronounced drop over the course of Q3, by 14% and 11% respectively. In particular, the volume of available space in Midtown is now at the lowest level in two years, and below two million sq ft. In fact, it is this market that has seen the greatest decrease in available stock over the past 12 months (-16%).

Elsewhere, The West End has seen a minimal shift upwards by 1%, with just over 4 million sq ft available. Yet it is in the Docklands market that has registered double-digit growth of 12% over the quarter with the level reaching 2.3 million, the same as at the end of 2017.

Our research shows that the greatest increase in availability levels has been in the fringe areas away from the more traditional City and West End. Areas such as Chelsea and Kensington in the West have seen levels rise by 54% over the past year.

Similarly, areas to the north (N1) have also recorded a leap in levels (33%). Looking at these figures through an occupier lens, the current volume of available stock in these offer an opportunity both in terms of choice and rental profile.

 

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Ending the year on a high


Historically there has always been a push to get deals over the line before the end of a calendar year. Consequently Q4 results have been strong and recent years have been no exception. Can we expect to see the same this year?

The volume of deals in the pipeline across central London has increased by 41% to what was recorded at the end of 2017. The lions share of this total is in the City and West End totalling 2.7 million sq ft (up 28% since Q4 2017). However, since the end of last quarter the volume of space under offer in the Docklands and the Southbank has decreased, although these markets still account for approximately 625,000 sq ft expected to be leased.

In tracking the volume of space that has been placed under offer it seems as though the final quarter will follow in the same vein as the rest of year. There is 4.1 million sq ft under offer and whilst not all will complete by the end of December 2018, leasing across

Rental levels hold in core markets

Rents continue to be at favourable levels for tenants. Prime Grade A rents across all central London submarkets have seen muted growth of just 1% over the past quarter. While the majority of submarkets have seen no change in Q3. Our research has shown that there has been an upward shift in fringe locations eastwards such as Hackney and London Fields (+6%) to £42.50 per sq ft. Closer to the centre, rental increases have been recorded in core locations such as Soho (now at £97.50 per sq ft) and a historic high has been achieved in the City Fringe West (Clerkenwell/Farringdon) submarket at £80.00 per sq ft. Only one submarket recorded a rental drop and that was for Grade B space in the Hammersmith market.

 

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Servicing corporate London with a tech boost

Take-up of office space was chiefly driven by the technology sector in Q3 2018, not surprisingly this was largely as a result of the 600,000 sq ft deal by tech giant Facebook. The technology sector’s share of office leasing activity amounted to 37%. This represented a significant leap from low levels recorded in Q1 and Q2. Other technology tenants active in Q3 include well-known names such as LinkedIn and Dell, as well as growth technology firms such as Habito and Bumble both of which DeVono Cresa have supported as their real estate partner. Yet it has been the corporate sector that has dominated leasing throughout the year, accounting for a quarter of space taken in 2018 so far (Q1-Q3).

The Corporate sector covers a range of businesses types from holding companies to retailers to name just two, but there is one type of firm that is the driving force behind the latest numbers, and that is the serviced office providers.

Leasing activity by serviced/flexible office providers has continued throughout 2018 and now account for circa 12% of all leasing activity. The most dominant of all has been WeWork who have taken space across six buildings with three in Midtown alone. Their voracious growth over the past five years has catapulted them to being named the largest occupier of office space in central London, behind the big banks and tech firms. Not to be left behind other providers have continued building up their stable of centres, such as LEO, Landmark, Regus (Spaces), The Office Group and even new kids on the block such as Cuckooz Nest and Geovation.

The growth of serviced and flexible workspace provision has taken the industry by storm. Here at DeVono Cresa we have seen the rise in this market first-hand, not just from our awareness of operator’s coverage but through our clients. No one typical business sector is choosing a flexible solution. The diversity of tenants has become more apparent, having advised over 75 businesses in 2018 who have taken serviced/flexible space over conventional lease agreements. The growth of the operators sees no signs of slowing as we fully expect to see them notch up a few more centres before the end of the year to bolster their portfolios.

Other occupier sectors that have fuelled tenant demand in 2018 includes the financial sector, whilst its share of leasing has dipped quarter-on-quarter it has still leased approximately 16% of space, behind the Corporate (24%) and Technology (19%) sectors.

 

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Central London Office Market Update
by Shaun Dawson
Head of Insights
sd@devonocresa.com

 

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