Central London Offices: Supply Review 2018

This year we have witnessed a significant mismatch between the London office market sentiment and the statistics. The political uncertainty surrounding Brexit has created an air of caution; however, this has not translated into a slowdown in occupier interest or commitment. In fact, the figures show an occupier market that is generally operating at levels that are slightly better than historic norms.

It was anticipated that we might see the number of occupier requirements fall away due to the political uncertainty; however, this has not been the case. Total active demand at the end of Q3 2018 was 8.2m sq ft, which is 33% above the long-term average.

Occupiers are still committing to London and continue to pursue large office units to satisfy their requirements; however, there is particular pressure on availability of units over 50,000 sq ft, with options for occupiers becoming increasingly limited. 

Central London Active Demand over 50,000 sq ft

Source: Knight Frank Research

Take-up

The strength in occupier demand has continued. There have been 45 transactions over 50,000 sq ft in London over the last 12 months, compared to a long-term average of 28 transactions per year.  In the first nine months of 2018, 34 transactions over 50,000 sq ft have completed, which is already 22% above the long-term average. 

Occupiers from the TMT, financial and public sectors, including Facebook, Deutsche Bank and The Chinese Government, have dominated the largest deals that have transacted this year. 

In the last ten years, 68% of deals over 50,000 sq ft have been in new and refurbished stock.  This trend continues, maintaining the pressure being placed on the development pipeline. Furthermore, it is also important to note that 41% of these sizeable deals have transacted either during or pre-construction. 

Central London Take-up over 50,000 sq ft

Source: Knight Frank Research

Demand

Knight Frank are currently tracking 66 active requirements in excess of 50,000 sq ft across the Central London market, an increase of 8% year-on-year and 68% ahead of the long-term average. To put this into context, on average there are no more than 40 requirements over 50,000 sq ft per year. 

As the size of the requirement increases above 50,000 sq ft, the number of options begin to quickly decline, with particular submarkets simply unable to offer any sizeable units to larger occupiers. This is certainly the case in the West End. The majority of larger units are currently situated around the City Core, Canary Wharf and Stratford. 

There are currently 25 unique requirements across Central London for units in excess of 100,000 sq ft, plus a further 41 between 50,000 and 100,000 sq ft; however, there are currently only 35 buildings capable of satisfying these requirements, resulting in a total shortfall of 31 options. 

Supply vs. Demand over 50,000 sq ft

Source: Knight Frank Research

Supply

Options over 50,000 sq ft are limited outside the City Core but Central London’s traditional boundaries are expanding and commercial occupiers are increasingly footloose, with an increased number of occupiers relocating to a different submarket compared to five years ago. Last year, 70% of transactions over 50,000 sq ft moved submarkets, compared to just 36% five years ago. 

As the pressure on availability of units over 50,000 sq ft continues, the occupier focus is now more about the product and pricing than the location. The success of locations such as White City, Stratford and Battersea are testament to this change. With the right product available, Central London has seen an appetite from all industry sectors as well as attracting interest from emerging sectors. 

Available Units over 50,000 sq ft

Source: Knight Frank Research

Conclusion

We are yet to see the full implications of Brexit but with consistently strong levels of demand, coupled with downward pressure on future stock, we believe supply has now peaked. Occupiers who are looking for sizeable units, especially new and refurbished options, will need to be open to considering other parameters outside pricing, including location and product. 

As options for large occupiers are diminishing in Central London, they must look to launch their office search well in advance of future lease events to maximise their negotiating leverage and chances of securing suitable accommodation. 

We can help you find the perfect office space. Visit Knightfrank.co.uk/office-space for flexible office space for businesses of all sizes.