Summer of Strong Demand
Strong tenant demand for central London offices has been a recurring theme in our market commentaries over the past year with the latest data for Q3 2019 showing that this trend has not dissipated throughout the summer. So much so, take-up reached 4.1 million sq ft, 40% above the long-term quarterly average.
A healthy return of tenant activity following the 2016 EU referendum at first showed resilience from businesses despite the initial political upheaval. With the annual total volume leased having returned to those similar to 2013-15, one could suggest that there is a high degree of normalcy now associated with demand levels. Strong and stable may have been an overused phrase in the run-up to the 2017 election, but it sums up the three-year long run of strong and stable tenant demand across London.
Not to discount the level of take-up in Q3 but it is worth noting that the driving force for leasing activity was the serviced office sector. They continue at a significant pace their quest for greater coverage and in greater numbers too. Leasing by this sector accounted for 33% overtaking the usual occupier sectors such as financial (21%) and technology (7%). Despite the recent press attention WeWork has once again led the charge by taking 431,220 sq ft across 9 schemes. Yet, there were 10 other providers who have also secured space highlighting the competitive nature of this sector of its current growth path.
The significant level of leasing over the past year is now starting to make a dent in the volume of available office space across central London. From Q2 to Q3 2019, availability dropped by 5% to 14.5 million sq ft representing the lowest level since 2017. The flight to quality by tenants is also ensuring that the share of available Grade A space is also tempered. As such, the dynamics of the market that are now at play are starting to apply increased pressure on rents, which could well impact client searches.
Tenant Commitment to The City
Another summer passes and another bumper volume of take-up of office space across central London. Like Q3 2018, there was no slowdown for the office market in Q3 of this year either. A total of 4.1 million sq ft was leased, a 15% rise on the previous quarter. Breaking the 4 million mark for the third time in past 10 years. In fact all three of these “record breakers” have now been in the past 5 years. Highlighting that amidst uncertain times London is still a draw for businesses, both domestic and overseas.
One market that continues to be a magnet for businesses is The City, accounting for 43% of take-up in Q3. Whilst Brexit continues to cast a cloud over the dominant financial and insurance industry, it appears that it has not dissuaded businesses to commit to space. Whilst the majority of demand is still derived from the financial sector, it is the diverse tenant mix that buoys the high levels of take-up this year, from media, education, charity to technology firms. The City has become more than just a home for bankers and brokers. At 1.8 million sq ft office take-up represents a 17% uplift on Q2. Taking the total demand for Q1-Q3 to 4.6 million sq ft, with still one quarter of 2019 to go this level is just shy (2%) of the long-term annual average. Replicating the all-time record level for the City of 6.2 million sq ft in 2018 may be a tall order. Nevertheless, 2019 looks set to still be a high-ranking year.
Top leasing deals by size - Q3 2019
Serviced office operators race for space
The high volume of office take-up in Q3 was in a large part the result of the exponential growth of the serviced office sector. Accounting for 33% of activity, it was by far the largest business sector to acquire space. Continuing a three-year run of robust demand, the race for operators to add more office space to their portfolio heated up over the summer. Serviced office operators have targeted the City in 2019, with half of all deals located in this submarket. Has the competition for coverage just got started?
Whilst the usual operators such as WeWork, TOG and IWG feature in Q3, there are others snapping at the heels of the “big dogs”. One such firm is Knotel, the US flexible space provider who have clocked up 4 new centres in Q3 alone adding to the 5 secured in the first half of 2019. Just to put the space grab into perspective there have been 24 separate operators secure new centres this year alone. Not to discount the coverage that these firm have gained, but WeWork’s expansion in 2019 has seen them secure 16 centres. There recent IPO debacle, revaluation and subsequent take-over by its main imvestor SoftBank could see them slowdown their acquisitions. Despite this they remain the single largest holder of office space in central London, a crown that others may now want to steal!
The financial sector continues to be active across central London, 21% of space taken in Q3. A number of well-known firms from this sector have secured space this quarter, one of which was Nationwide Building Society taking 88,700 sq ft at the recently completed Post Building in Midtown. In fact, 58% of space taken by the financial sector is new, under construction or refurbished, highlighting a clear direction of building quality that this sector is desiring.
One sector that has seen a reduced level of take-up is the technology sector. A mainstay of leasing activity through both the recent good and bad times appear to be taking a breather and demand has slackened somewhat. Still accounting for 7% of take-up in Q3, it is a far cry from the 37% share recorded in Q3 2018. Could this be evidence that smaller tech firms have been bitten by the flexible leasing bug or is the weight of uncertainty in the country at present curtailing their growth?