AVAILABLE OFFICE SPACE ON THE RISE

A rise in the level of office availability across central London was inevitable in Q2 2020, as the severity and longevity of the pandemic lockdown became more apparent. Our research shows that the increase in availability remained in single digits at 8%, reaching 14.9 million sq ft at the end of Q2 2020. This represents the largest quarterly rise in two and half years (Q4 2017) and the highest level in the past three quarters. It is, however, just shy of the level recorded in Q2 2019 (-2%). But what is clear is that the direction of travel for availability is now set for the rest of the year, and that is upwards.

The unprecedented nature of lockdown and the way in which businesses were curtailed in their activities has potentially subdued the rise in availability in Q2 2020. It was not just occupiers who were stopped in their tracks with regards to real estate planning, but so too were the real estate professionals. If property agents were working at their full complement, we could well have seen a greater increase in spaces being marketed. As such, we believe that reduced activity has cushioned the rise from being larger.

At the peak of the 2008 Global Financial Crisis (GFC), quarterly increases in available office space across central London were in double figures, peaking at 20% in Q1 2009. This was partly fuelled by an oversupply of new space delivered to the market and a direct hit to the largest occupier group, the financial sector. Both combined put upward pressure on availability levels. The current situation, whilst hard to read, a combination of reduced leasing, the potential for downsizing, surplus space returning to the market, and increased attraction to flexible leasing options will provide the momentum for the double-digit rises.

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The greatest rise in availability over the quarter was in the West End at 15% now up to 3.3 million sq ft. This is a market that had seen a dwindling amount of supply, now back to the same level as in Q4 2019 but remains 6% below the level in Q2 2019. The rise in availability will be welcome to those occupiers with active or on-hold requirements, providing a greater range of available spaces.

The overall rise in the West End can largely be attributed to the uplift in the volume of Grade A space. Over the quarter, the volume of available Grade A space increased by 23%.

Submarkets such as Mayfair and North of Oxford Street represent just over half of all available space, with 28% and 23% respectively. However, there are areas of tenant attraction such as Soho where availability has increased by just 4% to 223,711 sq ft and King’s Cross / Euston has near enough stayed the same with only a 1% rise over the quarter to 184,000 sq ft.

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NOT JUST THE TOWERS RISING

In the City, availability levels have increased by 8%, taking the volume above 5 million sq ft for the first time since Q2 2019, now at 5.3 million sq ft. Whilst this increase is significant, the level is still below (3%) at the same point in 2019. Availability in the City throughout 2017-18 was consistently above 5 million; it was only in the latter part of 2019 that levels went below this level.

However, history shows that increases can occur with pace at times of distress, which is what occurred in the City during the GFC in 2008-09. Whilst the City took a direct hit from the financial sector fallout, the rate of availability
increases averaged 15% per quarter. Should we start to see similar signs of business failure and wholesale closure of offices (non-COVID related) in the City, then we could expect the volume of available office space to increase at a greater pace.

A YEAR OF FALLS REVERSED IN SIX MONTHS

Before the pandemic, our commentary was very much about falling availability rates, a squeeze on space, and limited choice. What a difference four months makes; well, it reversed a years’ worth of reduction in availability levels in almost all markets across central London. Whilst the volume of available space sits just below the level recorded a year ago for most markets, there are some instances where this is not the case.

The Southbank, which has proved to be an attractive market for occupiers, had seen low levels of availability since Q3 2018. With six consecutive quarters of decline in availability, the recent rises have now reversed this and are 42% up on the total in Q2 2019, now at 1.1 million sq ft. Whilst not as pronounced as in the Southbank, availability levels in Midtown (2% up) and East Fringe (5% up) are now higher than a year ago.

INCREASE IN SMALLER SPACES TO LET

Delving a little deeper into the composition of central London office availability, our data shows that spaces below 5,000 sq ft account for 76% of the total number of availabilities. This is an increase in the share a year ago which was 67%. This size range represents the part of the market that makes up the general ‘churn’ of leasing, and with a downturn in deals, it is no surprise that the number of spaces has increased. Should smaller firms continue to hold back from making property decisions, it is expected that the volume of space below 5,000 sq ft will continue to increase.

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Conversely, larger sized spaces have reduced in numbers over the past year, highlighting the squeeze that some occupiers have felt in trying to satisfy requirements above 25,000 sq ft. Accounting for 3% of the market, this is down on the 6% in Q2 2019. Nevertheless, the market is now in a different place, and although we do expect the number of larger available spaces to increase, especially as new developments complete over the next 12 months, a huge leap in the number is not expected at least for the remainder of 2020

RISE IN GRADE A OFFICE SPACE

The attraction to the best quality office spaces has been evident through leasing activity over the past few years, even in Q2 2020. Whether it is preletting development space or taking existing offices, the level of popularity has ensured that the volume of available Grade A space has remained at consistent levels. Our latest data shows that the level of Grade A space has risen by 12% over the quarter and now is at its highest level since 2014, surpassing the 4
million mark.

Whilst a rise in Grade A availability gives occupiers a greater range, it will cause landlords consternation as the shift in the competitor landscape will lead to a shift in rents.

Second-hand space remains the largest proportion of availability accounting for 71% of all available space. The rate of increase in this type of space has been 6% over the quarter and is now 10% higher than at the end of 2019. This figure is more than likely to increase and at a faster pace than we have seen so far, with the traditional locations of the City and West End potentially seeing the greatest rises.

Over the next six months, we expect to see the pace of decision making by occupiers to crystallise, which, for some, will result in surplus space being released back to the market. We also expect to see a resumption of activity from landlords and their agents. These will both give way to further rises in the availability of office space and give tenants a lot more choice of stock but also allowing for further pressure on landlords to adjust rental expectations.