Smaller end of the market

Recent research from property firm Colliers International suggests a higher demand for startup-sized offices in London and this in turn is putting a downward pressure on lease lengths.

Colliers say that across London in 2018 to date, transactions for space of 5,000 sq ft or less represented 78% of the total deals by number, up from 69% in 2015. Sub-2,500 sq ft offices represented 57% of the deals by number – the category’s highest level since 2012.

Metropolis saw 306 letting in the first six months of 2017 of over 5,000 sq ft each, although in the same period in 2018 this fell slightly to 278 deals.

Colliers, which is forecasting the average lease to fall to 5.5 years during the course of 2018. The property adviser says that 2018 is the third successive year in which the proportion of sub-5,000 sq ft deals has risen.

According to Colliers, the trend is particularly evident across Shoreditch, Soho and Paddington.

WeWork’s exposure to London is likely to exceed 3.5 million square foot in 2018, putting increasing pressure on landlords, particularly those with assets around the 5,000 sq ft mark, to offer a more flexible, hybrid product to attract occupiers.

Stuart Melrose, director and head of occupier advisory for London offices at Colliers, commented: “We are seeing demand for flexible office space under 5,000 sq ft approaching an all-time high.

Research by Metropolis of over 820 London office lettings between January and June 2018 suggests an average lease size of 8130 sq ft compared to nearly 9,000 sq ft in 2017. The average lease length is 5 years, but with over 40% of lettings of 4 years or less.

The implication of this trend could be that companies operating in the market may need to contend with smaller relocations, with occupiers moving more frequently.

 

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Office Leases – How Long?

Recent research by property consultant Strutt & Parker and MSCI (underlined by recent Metropolis research) reveals that lease lengths have fallen to an historical low, which is leading to a greater volume of office moves than seen in previous decades.

In the last 25 years average lease lengths have fallen from just over 20 years to 7.2 years by early 2015 in all sectors and 6.9 years in the office sector. In fact, if the short leases in serviced office buildings are taken into account the average lease length is set to fall further.

The report reveals that 73% of leases signed in the UK in 2015 were for 5 years or less. ten year leases are now a relative rarity, although generally, the larger the building and tenant the longer the lease.

London office leases average 6.3 years, with South East leases at 6.1 years. Nearly 38% of office leases include a tenant lease break option and are most common in leases of 6-10 years.

Perhaps of most interest to companies operating in the office relocation market is the outcome of decisions when companies approach lease expiry. The survey shows that 71% of office tenants vacated their offices at or in advance of expiry with 26% renewing.

Of those tenants that renewed their leases, 43% waited to within 3 months of the renewal date to sign the new lease. Those tenants that moved commonly relocated to a building with less expensive rents. However only 24% of office tenants with a lease break option exercised that option.

In conclusion, with large numbers of office tenants taking short leases and increasingly looking to vacate premises when leases expire, the business opportunities to assist office tenants in relocations have never been higher. Metropolis provides a weekly digest of many of these opportunities.