Erosion of availability accelerated

The total volume of available office space across central London at the end of Q3 2019 dipped below the 15 million sq ft mark for the first time since Q1 2017, now at 14.5 million sq ft. This drop is a result of a reduced number of spaces being marketed and the significant level of leasing across the year so far. Up until now quarterly decreases have been minimal, at 5% the latest decline is the steepest in four years. Despite this the total still seems high, but it is a different story at the local level, with the paucity of supply of the right kind of stock in certain locations impacting tenant choice.

Availability and indeed choice is concentrated across the top three markets, The City, West End and Midtown, which account for 72%. The majority of office markets across central London recorded a drop of availability ratios at the end of Q3. The greatest of which was in the City with a reduction of 10% over the quarter. Available office space is now sub-5 million sq ft; a level not seen since Q4 2016. Of note, availability in the EC2 postcode fell by 28% over the course of the quarter. Historically the largest of the EC areas, now holds marginally less available space than neighbouring EC3. The average size of space available across the City at the end of September was 8,000 sq ft down from 9,000 sq ft at the same point last year.

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The volume of available space in the West End is now at a 3-year low of 3.4 million sq ft, which is below the long-term average of 3.6 million sq ft. More acutely the level of available Grade A space in this market is now 18%, a level that has not changed over the past year or so. Prompting calls for speculative developments to begin to offer a greater range of stock to tenants.

The Southbank market is also reaching new lows in the latest cycle. A drop of 5% over the quarter to 753,000 sq ft is now the lowest level since 2017. Whilst one building can affect this market, the scale of current supply is leading tenants to look elsewhere. Not only a lack of new developments is impacting availability but also the high level of letting on any new spaces is also a factor. The Hoxton Southwark hotel on Blackfriars Road is a new mixed-use building recently completed. It features 41,000 sq ft of office space, yet this space is to be co-working membership only, another factor to dwindling supply is the uptake of space by serviced office operators. Nevertheless, there are a number of new office schemes either in their development infancy or waiting to begin that would ensure that the current level of availability is a short-term issue.

Bucking the general trend is Midtown, where there has been a rise in its availability ratio, albeit a small one at 2%, Midtown currently has 2.2 million sq ft available and has been consistently above 2 million sq ft since 2016. Whilst this appears to be a good level for the size of the market, the range and quality of space is limited. With 78% of the space available being secondhand, and only a few options of space in excess of 10,000 sq ft, it is no surprise that new developments are secured in advance of completion. As the erosion of available office space continues and at a pace, our research leads us to suggest that the range of space opportunities will continue to tighten, apply pressure on rents to creep northwards. These factors could force businesses to adjust their searches especially those that centre around Soho, Victoria, Southbank and the City fringes.

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