Stagnation Ahead: New Stats Show London Office Occupiers In The Driving Seat
New data on London’s office occupiers suggests “a mixture of rental decline and/or stagnation in varying degrees” up to 2023 as the more sober occupiers grab control of the wheel.
Occupational data reveals the petrol-head sectors who had their foot on the accelerator have yielded power to more sober forces, who are now stamping on the brakes.
“Over the past 12 months, the office leasing market has moved from one favouring landlords, to one that now largely favours tenants," DeVono Cresa Head of Insights Shaun Dawson said. "There is currently a window of opportunity for tenants to benefit from shifts in the market. This could manifest as a rental reduction, improved availability of better-quality space, or better incentives for those renegotiating and renewing existing leases.
“Knowing when the market will shift back, will, of course, impact future commercial real estate strategy decisions.”
The dominance of old-reliables over revved-up private equity-fuelled newcomers explains the change in market speed and direction.
The serviced office sector, which in 2019 accounted for 17% of total London office take-up and was in second place to the financial services sector (24%), has now been relegated to the passenger seat — or perhaps the glove compartment. Serviced offices accounted for just 3% of take-up in 2020.
The legal and media sectors, which accounted for 5% and 6%, respectively, in 2019, have stepped up their share of what is admittedly a seriously smaller market. In 2020 they both accounted for 13%, suggesting they remain at least reliable sources of demand.
The technology sector held steady at 13% of floor space transacted in both 2019 and 2020, thus joining the list of London’s reliable space-invaders, alongside the insurance sector (4% in both years) and professionals (10% falling slightly to 9%).
The average deal size in 2020 was 20% lower than the long-term average. Available office space reached 18.5M SF in Q4, a 12% jump on the previous quarter, and up 36% over the year. It is now at its highest since Q1 2012. In the City the picture was even worse, with availability up 45% and at a similar level to that seen during the global financial crisis of 2008.
Not surprisingly, rents took a hit. Prime grade-A and B office rents fell by an average of 5% and 6%, respectively, across London submarkets.
DeVono Cresa concluded: “We expect that the next two years could return a mixture of rental decline and/or stagnation in varying degrees across central London office submarkets before growth kicks in once again.”