Strong fundamentals to fuel growth
Leasing of office space in the first quarter of the year tends to be the lowest out of the four. Throw in some Brexit jitters and you would be forgiven for having modest expectations for Q1 2019. Yet, at 3 million sq ft, levels have held their own. Following on from the high quarterly volumes recorded in the latter half of 2018, the drop of 14% from Q4 2018 is not a cause for concern, as it remains above the long-term average.
The latest data from the Office for National Statistics indicates that the UK economy grew by 0.5% in Q1 2019, up from 0.2% the previous three months. The stockpiling of products and a rush to complete orders ahead of the original 29 March Brexit deadline gave a short-term boost to GDP figures. Similarly, data on the jobs market also paints a rosier picture as the employment rate across the UK remains at a record high of 76.1%. Importantly, the unemployment rate is now at its lowest level since the 1970s at 3.9%. Whilst this economic data does not directly correlate with the leasing activity across London, it does however provide strong fundamentals and impetus for businesses to make future workplace plans.
At the start of Q2 2019, 3.4 million sq ft of office space was under offer. This is less than the 4.3 million sq ft recorded at the end of 2018, still above the average and should boost leasing activity over the next 3-6 months.
Top leasing deals by size
Smaller deals sustain leasing levels
Over the course of 2018, our previous editions of The Occupier have highlighted the increased frequency of the large-headliner deals. Whilst Q1 has seen a handful of large deals, our research shows that leasing activity has generally been sustained by smaller deals.
The average size of office space transacted across central London in Q1 2019 was 7,300 sq ft, down by 26% on the previous quarter, and slightly below the long-term average of 7,900 sq ft. This latest data indicates that the market is continuing to see normal churn of businesses leasing offices, and activity is not necessarily reliant on the large deals to achieve average volumes.
The most noticeable dip in the average office deal size in Q1 was in the Southbank market. The average deal size was 4,200 sq ft, just over half the average long-term quarterly figure of 8,500 sq ft. The reduced level of large available office spaces in this area has impacted the number of deals at the upper-end. Coupled with serviced office providers leasing up large chunks of space in recent years, leading to limited choice for tenants.
A drop in the average deal size was recorded in all submarkets except the North Fringe (1% up) and the West End. The latter saw an increase in average deal size to 7,465 sq ft in Q1, up by 22% on the long-term average. This has been as a result of larger deals of new and Grade A space in a number of West End locations; King’s Cross, Paddington, and even Mayfair-St James’s.
Businesses taking small-to-mid sized office space are the very core of the leasing market across central London and as such are targeted by both conventional leasehold landlords and the fast-expanding flexible office providers. As we mentioned in our The Occupier: 2019 Predictions report at the beginning of the year, 2019 will be the year that competition for customers will be hotly contested. So, it will be a case of watch this space to see how the contest fares!
Ebb and flow of availability
The amount of available space across central London at the end of Q1 2019 stood at 15.6 million sq ft, representing a drop of just 1% on the previous quarter. Despite robust demand at the start of the year, the overall level of office availability continues to remain shy of the long-term annual average.
At the macro level it seems as though there has been little movement. However, drilling down to the various central markets shows that there has been some ups and downs with regards to availability levels. At 11%, the West End recorded the greatest quarterly drop. Buoyed by strong demand, availability ended Q1 2019 at 3.6 million sq ft – the lowest level in two years.
Conversely, the Midtown market saw a marked rise of 11% at the end of the quarter to 2.2 million sq ft. This upward trend is attributable to the large amount of space made available at the start of the year, to the tune of 390,000 sq ft, of which 70% is secondhand space. In fact, the glut of secondhand space available across all central London markets equates to 79% of the total – above the long-term average (77%).
In the City there is currently 1.6 million sq ft of Grade A space available. This figure has been boosted with recent developments completing construction such as The Scalpel, 52 Lime Street and One Bartholomew. We have also recorded a number of Grade A tenant spaces that have come back onto the market, this includes surplus space at the newly built 55 Gresham Street, which DeVono is marketing on behalf of its client, likewise at One Bartholomew. We do expect availability levels to rise in the City in 2019, as a result of a number of schemes that are due to complete development.
Financial firms drive Q1 leasing
The financial sector continues to lead letting activity across central London, accounting for 21% of office space leased in Q1 2019. Over the past two-years, financial firms and their requirements for offices in London have probably had the most scrutiny out of all businesses because of Brexit. Nevertheless, the sectors commitment to London is holding steady judging by leasing activity.
The largest financial sector letting in Q1 was by investment and wealth managers firm Quilter, taking 85,000 sq ft at the recently renovated 85 Queen Victoria Street, EC4. Elsewhere in the City, brokerage firm Peel Hunt have committed to 40,000 sq ft at 100 Liverpool Street, currently under development by British Land. In the West End, trading firm Glencore have leased 54,000 sq ft at 18-19 Hanover Square, currently under construction above the new entrance for Bond Street Crossrail station. From one square to another, private equity firm Cinven Partners have taken 51,000 sq ft at 21 St James’s Square. What these deals show us is that not only are financial firms committing to London, but in some of the best-in-class buildings that are available.
The ever-present technology sector in London accounts for 14% of space let in Q1. The largest deal by a tech firm was Facebook who has leased 145,000 sq ft at 10 Brock Street, hot-off-the-heels of their 600,000 sq ft super-deal at King’s Cross Central in 2018. Whilst the past couple of years leasing has been dominated by the larger technology firms, lettings in Q1 originate from smaller software firms taking space in the City market.
In comparison to recent quarters, serviced office providers have had a rather subdued start to 2019. At 11% of take-up, this level is down on the 2018 quarterly average of 14%. Likewise, with 15 transactions in Q1, the number of deals is down from the 20 recorded in both Q3 and Q4 2018. Rather than a slowdown from serviced office operators, it is more symptomatic of the volume leased in 2018. We still expect this sector to be robust in the year ahead.
Other deals of note this quarter include Sony Music committing to 124,600 sq ft at the latest Handyside Street phase of King’s Cross Central. This area of London is fast becoming a hub of creative giants. The development is already home to Havas Media, PRS for Music and Universal Music.
Our research of office leasing activity in Q1 2019 has shown that the average deal size has dropped both on the previous quarter and long-term average. However, the average size of space taken by some business sectors has dropped more than others.
The most notable fluctuation of deal size by sector is with Government/public body tenants. Despite a sharp rise in the average size of space leased in 2018, this sector is leasing 55% less than the 10-year average. Other traditional tenant sectors such as Legal and Insurance have both recorded a drop in size of office space leased by 56% and 50% respectively.
However, a nod to the growing diversity of central London, has seen the ‘Other’ sector, which comprises of education and charity tenants to name a few, increase their space taken by 32% compared to the 10-year average and a significant 125% increase on the 2018 average.
On the other hand, the Media sector has maintained conistency and hovered around the same size of 8,500 sq ft.
* Other = Education, charities, health
SMEs strive for success
When looking to understand the current and future business landscape, most commentators look to the large listed corporates for answers. Yet it is the private sector, and in particular the small-medium-sized enterprises (SMEs), that play a crucial part in the UK’s success. Employing 16.3 million people, generating £2 trillion, according to the Federation of Small Businesses, it is these firms that will be important to future office leasing. So, what is on the mind of these businesses, not just here in the UK but globally? Professional Services firm Deloitte have recently launched a survey of over 2,500 executives from mid-sized private companies – The Deloitte Private. Overwhelmingly, there is a high-level of confidence as nearly half are looking to grow their workforce. Private companies appear to have a strong belief that they can thrive – but what do they see as possible stumbling blocks?
There is a myriad of factors that could pose a risk to revenue and headcount growth over the next 12 months, Deloitte’s survey lists those that were ranked likely to have a high or very high impact. Isolating the survey results from companies in the EMEA region (Europe, Middle East & Africa), trade barriers top the list. The worsening of trade relations also featured as DeVono’s #1 prediction for 2019. The effect that trade barriers/wars could have on business revenue stems from reduced investment, expansion and/or job losses. The heated trading environment between nations (especially between the US and China) was anticipated. It had seemed that the rhetoric had calmed in recent weeks, however a ramping of sanctions looks like this will run on.
Cyber attacks also feature highly in the list of disruptors. As businesses are more reliant on computer technology from emails to online transactions, all the way through to workplace automation, businesses have never been so vulnerable. While measures are taken to prevent attacks, the cyberhacks are one step ahead. Protecting a business against such an attack, could be a costly undertaking.
Also featured on the list is disruption by both traditional and non-traditional competitors. As such businesses are looking to implement new business models to address this disruption by bringing in dedicated teams and exploring opportunities from disruption. Changing business models, or even attracting new genres of employees to stay ahead of the competition, could impact the type of office space or even the location required to operate effectively and attract the right talent.
This survey shows that private SMEs are aware and cognisant that change may be required in which to thrive. Whatever the disruptor, we believe that real estate and the workplace can be deployed to help counter these roadblocks and improve a company’s strategy, for business and employees.