Q2 2019 Market Overview
BUSINESSES POWER ON WITH LEASING
Central London office leasing activity gathered momentum in Q2 2019 with 3.6 million sq ft transacted, up by 18% on the previous quarter. This level of office demand is not only above the long-term quarterly average, but is the fifth consecutive quarter recording over 3 million sq ft. Whilst our research on space under-offer in Q1 pointed to strong upcoming demand, the latest data from DeVono Cresa shows that businesses have progressed with those deals in Q2, countering some expectations of a slowdown.
The financial sector continues to power on and has once again led the pack accounting for 29% of the space transacted in Q2. The volume of space taken by this sector was largely buoyed by two deals in buildings under-development. The European Bank for Reconstruction and Development has taken 360,000 sq ft at Canary Wharf’s 5 Bank Street. Over in the City, Brewin & Dolphin have pre-let 116,000 sq ft at 25 Cannon Street.
The strength of demand for office space across central London in the first half of 2019 has led to just shy of 6.6 million sq ft being leased. Whilst this is a fraction less (-2%) than that in the same period in 2018, the statistics show that take-up levels of space have ‘more-or-less’ normalised since the 2016 EU referendum. Whilst business optimism and confidence is volatile and could be especially so in the next few months, occupiers have increasingly been drawn to the new and refurbished office stock. So far this year just over 49% of space taken has been Grade A (either built or under-development), this is up on the 45% recorded in H1 2018.
LARGEST LEASING DEALS IN Q2 2019
SQUEEZE ON CHOICE OF SPACE
The propensity for businesses to take the best or better space on the market is leading to a dearth in choice for some occupiers. From a macro level the volume of available office space across central London continues to be high at 15.2 million sq ft. Although this is a drop of 4% since Q2 2018 and 7% down since the peak in 2017, the figures are masking the difficulty in matching requirements with the available office stock.
For example, in the West End there is 3.5 million sq ft available, this is the lowest level since 2016. The situation is exacerbated when just 22% of this is Grade A space. If the market already felt tight, then focusing on specific submarkets such as Victoria or Soho sees the choice narrow further. You would be forgiven for thinking that the situation in the City would be different. It seems as though new buildings are popping up across the skyline, yet availability in this critical office market is also down over the past 12 months (-4%) to 5.5 million sq ft. Grade A space in this market is also reducing, largely as a result of early-letting and pre-letting of new developments ahead of completion. Occupier searches are increasingly getting earlier in order to secure space, as well as more occupiers being open to new locations and taking more space for future expansion.
UPWARD MOVEMENT ON CITY RENTS
Rental movement across central London submarkets on average have remained steady. However, as the squeeze on the availability of Grade A gets tighter in certain areas, we have seen some upward pressure on prime rents - especially in fringe locations.
Grade A rents in the City Core continue to be pegged at £68.50 per sq ft, yet it is in the surrounding submarkets that we have seen growth. Top space in the City Fringe West increased by 2% to £81.50 per sq ft over the quarter, buoyed by new developments such as Helical’s One Bartholomew scheme. Likewise, in both the northern and eastern fringes of the City rents have risen by 3% to £75.00 and £61.00 per sq ft respectively.
Only one submarket has seen a decrease. Hammersmith continues to see prime rents chipped away, now down to £54.00 per sq ft. Grade B rents have also remained steady, with only a few movers this quarter. Euston-King’s Cross Grade B rents are now pegged at £67.50 per sq ft (+4%) and Midtown at £62.50 per sq ft (+4%). Eastwards, in the Aldgate and St Katharine’s Docks area, Grade B rents have increased by 6% to £45.00 per sq ft, setting a new high for this submarket.
In the latter half of the year, should demand continue with the same robustness prime rents could see pressure intensify on the rental tone.
A GROWING WORKFORCE
An upturn in the UK economy in the first quarter appears to have been short-lived as GDP growth contracted by 0.2% in Q2, suggesting a weaker economy than previously thought. This is seen to be a direct consequence of a shift in the timing of Brexit. Following stockpiling and contingency planning Q2 has recorded reduced manufacturing output and slower growth in the services.
However, the downturn in activity has done little to dampen jobs growth, which increased by 115,000, taking the employment rate to 76.1%, the joint-highest since records began in 1971. This equates to 32.8 million people who are in work. In addition, wage growth has also been strengthening in recent months, rising at its fastest pace for 11 years to 3.7%.
Whilst growth in both job numbers and wages was a little unexpected, the aforementioned GDP contraction could put the brakes on any further growth or at least slow down the rate in the remainder of 2019. Whilst this is not expected to impact leasing activity immediately, it will filter through at some point over the next year or so and create more uncertainty.
Demand for office space across central London illustrates confidence and resilience from the business community. Expectations of a drought in demand have not transpired. Whilst we are still cautious that leasing activity could harden in the latter part of 2019 and beginning of 2020, the level of space under offer (3.9 million sq ft) and the number of open requirements are reasons to be relatively upbeat. Should demand continue at the same rate, pressure will be put on availability and subsequently rental prices, albeit not at a fast pace.
SECTOR SPOTLIGHT: LEGAL
LEGAL SECTOR IN GROWTH MODE
Over the past few months the market has seen a noticeable burst of activity from a single business sector. The legal sector has grabbed attention with a high number of active requirements. Whilst only 201,000 sq ft has transacted so far this year, more is expected as legal firms scour the capital for space. This includes a number of DeVono Cresa legal clients such BDB Pitmans who are seeking out a new workplace.
The largest deal in H1 2019 has been 68,275 sq ft taken by Milbank at 100 Liverpool Street, early-letting on the British Land redevelopment. Elsewhere in the City, Cadwalader, Wickerhsam & Taft have early-let 21,700 sq ft in the soon to be completed 100 Bishopsgate tower. These deals highlight that legal firms also have an appetite for new buildings, so much so that 62% of space leased by the sector this year is of Grade A quality.
LEGAL FOOTPRINT CROSS-LONDON
The number of firms who are known to be looking or will soon start their search totals 23, representing what could be close to 1.9 million sq ft of office space. Whilst some of these requirements could be a few years out before breaks or expiries, searches are beginning in order to secure the right space, at the right time.
Already over the summer we seen two significant deals announced. US law firm Cooley have committed to 75,000 sq ft of tower space at 22 Bishopsgate. This is a significant uplift on the approximate 26,000 sq ft they currently lease.
Similarly, Kingsley Napley are doubling their footprint having recently confirmed that they are taking to 51,344 sq ft at the soon-to-be redeveloped 20 Bonhill Street. The latter will see the firm move eastwards from Farringdon to the Shoreditch area. Whilst the majority of firms who have leased space in 2019 have remained in the same market as previous (72%), legal occupiers are becoming more footloose in their choice of location. More moving to the City and even the Southbank. We have also seen new entrants to central London as regional players get a foothold in the capital.
Legal firms have been slow to adopt to modern office environments, the nature of the work and a perceived need for privacy has hindered the pace of change for some firms. However, moving to newer buildings, newer locations and introducing new ways of working and/or new technologies is expected to facilitate a change. In an industry that is rife with competition for business and talent, all tools need to be deployed to stay ahead.