Future demand for office space in the capital - the sectors to watch
Since the EU referendum, demand for office space in Central London has remained surprisingly robust. Leasing activity in 2017 vastly outperformed the previous year, with 4.1 m sq ft acquired – 31% above average.
5 minutes to read
The growing economy and workforce will create expansion-led demand for office space. Knight Frank has delved deeper to provide the following guide on sectors to watch:
Tech will drive demand for London space
London has seen an unprecedented volume of office space taken-up by TMT firms over the past five years; more than 17 m sq ft of office space has been acquired during that period, equivalent to the entire Clerkenwell and Shoreditch office market.
Given that London’s largest tech players have all made long-term commitments on new HQ premises, has demand from the tech sector peaked?
Perhaps the best way to approach this question is to ask ourselves if we believe that the evolution and development of new technology has ended. The answer is definitely “no”; we can be certain that the growth of tech companies will continue. Indeed, it has been suggested that the demand for tech-related goods and services could potentially triple over the next decade.
So, where will the growth come from?
"70% of all transactions to TMT firms in the last five years have involved units smaller than 5,000 sq ft"
Over the past few years, attention has been on the tech giants; the London real estate industry has been trying to second-guess the sector and identify the next Google or Facebook to commit to large-scale developments. However, office demand from TMT firms has not just been from the global firms; 70% of all transactions to TMT firms in the past five years (by number) have involved units smaller than 5,000 sq ft.
The reality is that the sector will be driven forward as much by the small companies making technological breakthroughs that are hardly reported outside the sector. Wireless innovation and the Internet of Things are set to become an even bigger part of our everyday lives, both in the workplace and at home, and provide myriad opportunities for new innovation from small firms.
In fact, according to data from UKTN, tech funding of London firms has accelerated since the referendum and shows little sign of slowing down.
Source UKTN: January 2018
We will also see growth from the larger occupiers as they continue to refine their products and services. Facebook recently announced its intention to double its staff working on security to 20,000; this will be a growing area of concern for all tech firms and will create growth as staff are hired to counter cyber threats.
In addition, we predict that new entrants from the biotech, Artificial Intelligence (AI) and life sciences fields will add to TMT demand in the next five years as they chase London-based talent and develop products via desks and computers rather than lab-based science.
But don't write London's traditional occupiers off just yet
As we have examined elsewhere in this report, demand from flexible working providers will play an important role in the Central London market in the future, with both WeWork and Knotel now offering managed space to corporates outside the traditional coworking parameters. However, we must take care not to write off the industries that have been taking space in London for the last 30-plus years.
Inevitably, change creates opportunity, and while some firms will suffer after Brexit, potential loosening of regulation could generate new demand across the financial and professional sectors in the longer term. In the short to medium term, the professional sector is likely to find itself under the spotlight.
The professional services sector faces Brexit related challenges, but conversely could be a source of new demand. As companies seek guidance and assistance in preparing for Brexit, demand for legal services will inevitably grow; in fact, there is also likely to be a considerable ongoing need for legal services as firms negotiate the post-Brexit environment.
"Unless we believe the evolution and development of new technology has ended, then we can be certain that the growth of tech companies will continue”
The same is true for accounting and management consultancy services, whose foresight and expertise will be in demand.
However, there are potential pitfalls for the sector. Brexit could make it harder for law firms to operate in the EU and, like financial firms, cause some to downsize their UK operations and relocate some lawyers to EU jurisdictions.
Some British lawyers have been fast to join the roll of solicitors in Ireland to maintain their legal privilege in EU cases; according to the Law Society of Ireland, around 1,250 UK solicitors have applied in the last two years. Prior to the referendum, applications would be expected to total between 50 and 100 per annum.
The future is less certain for the financial sector. Forecasts for the number of positions lost to the EU after Brexit vary wildly; the majority are headline-grabbing as they represent the unlikely worst-case scenario of a hard Brexit with no transition period deal. We believe banks remain unlikely to relocate staff to the EU in significant numbers.
In addition, they are actively exploring mechanisms such as back-to-back trading as loopholes to continue operating in the UK while a more permanent solution is found
When considering the future of the financial sector, Brexit has undoubtedly overshadowed other opportunities such as fintech; according to research by London & Partners, London is the leading centre for fintech start-ups in Europe, despite fears that Brexit would harm the industry.
The future's bright?
As we move towards Brexit, speculation will continue over how London’s businesses will be affected. It is impossible to predict the future but we have clear sight of what is taking place now: take-up of office space in Central London has performed well above expectations since the referendum and there is little sign of any major slow-down.
Short-term uncertainty is unhealthy in any market, but London’s occupiers have taken the view that the capital is the place for their longterm future. The majority are here to stay.
Julian Woolgar is Head of Knight Frank's West End Tenant Representation team.
The Central London office market is currently undergoing a period of significant change – but with big change comes great opportunity. Our latest report provides occupiers and investors with thoughts and guidance for the year ahead as the Central London office market continues to shift.