A Pragmatic Approach - H1 2018 Office Review
A BUOYANT FIRST HALF
The first half of the year has seen a lot of activity across most submarkets with a mix of growth, consolidation and lease events driving demand. Total take-up over the period was 6.3 million sq ft, nearly 700k sq ft more than the long-term average (although very close to the 2017 H1 take-up). And the split of space taken was nearly 50:50 new versus second-hand. This reflects the increased availability of refurbished buildings, resulting from developers’ tactical decisions to repurpose rather than redevelop. This could well be one of the reasons why so much of the new development under construction at present is already let (a little under 50%).
The most active sectors acquiring space remain the corporates (which includes serviced office operators) who accounted for approximately 22% of all lettings. The financial, government, technology & media, and professional sectors are proving to be significant acquirers of office space, each representing more than 10% of all take-up activity in H1 2018.
THERE IS STILL ENOUGH OUT THERE
It is not surprising that with all of this activity, availability has continued to reduce across London, although the total quantum available represents nearly 15.8m sq ft. There’s still plenty of space out there! At a micro level, the West End has seen a pronounced reduction in the amount of space available over the half year, although if you consider where the market was just two years ago, it is actually pretty well stocked. Supply in the City is generally flat, whereas Midtown and the Southbank have started to see some improvement in the amount of space available.
Away from the statistics, nobody can dispute the extent of uncertainty that exists in the market. The worries of local and global geopolitical policy and how that impacts London’s place in the world is enough to cause some concern to occupiers and owners alike. This uncertainty is manifesting itself through greater care being taken by businesses as they prepare for property related events and landlords becoming increasingly accepting of ‘reasonable requests.’ They are ultimately focused on securing tenants on the right terms, not necessarily the best terms.
CAUTION + PRAGMATISM = BETTER DEALS
The combination of cautious demand and pragmatic supply is translating into better deals being offered in the market with headline rents at least stabilising, but in many cases reducing and with rent-free periods (and other incentives) increasing. This is benefiting those tenants prepared to commit. As we head into the second half of the year, this trend is likely to continue.
With the increasing availability of flexible space options through scale providers such as WeWork, The Office Group and IWG, landlords are going to have to rapidly evolve their offer to ensure they can compete. There is no doubt that tenants want and expect a more customer focused solution – generally translating into shorter (or at least flexible) leases. It isn’t always the case that traditional landlords will offer it – considering it their bête noire – in the medium-term though, failure to respond positively and evolve the traditional offer will lead to a profound and irrevocable disconnect between ‘traditional’ landlords and commercial tenants.