New Lease Research from Metropolis

The London office market has maintained steady office letting take-up during 2017. The latest figures calculated by Metropolis to the end of Q3 2017 reveal office transactions totaling 8.8m sq ft for the first nine months of the year (deals 5,000 sq ft and above). Based on these figures and a number of large office moves under offer, 12m sq ft take up by the end of the year is not out of the question. If 12m sq ft is achieved this would surpass the 11m sq ft of 2016 and match the total for 2015.

The table below breaks down take-up in London in 2017 by the five largest sectors

Sector                             % of take-up
Financial                          20%
Business Services           19%
IT/Computer                   15%
Professional                     12%
Media                                11%

Financial services leads the way, boosted by the large pre-let in the City to Deutsche Bank. Business services comes a close second helped by over 900,000 sq ft of lettings to serviced office operator WeWork. IT has been driven by large expansions by Expedia, Amazon and Spotify. By area, the City has taken around 40% of take-up, with West End, Midtown and Southbank broadly taking 15% each. Docklands has had  a very quiet 2017.

Metropolis has recorded 96 deals for London office space of 20,000 sq ft or more in so far 2017 amounting to 5m sq ft. Business services, underpinned by WeWork deals, takes over 1.2m sq ft of that, followed by 880,000 sq ft of financial sector driven by Deutsche Bank, 600,000 sq ft of IT industry deals and nearly 500,000 sq ft from professional companies (law firms, accountants, consultants). a further 2m sq ft of deals are ‘under offer’ and close to signing in Q4 2017.

Recently some office market analysts have advanced the view that the London office market for moves under 20,000 sq ft is ‘patchy’. So Metropolis went back to all the potential office occupiers contacted in 2016, approaching 2017 lease expiries, to trace what happened next.

Taking a sample from the 700 London-based occupiers contacted during 2016, Metropolis found that, despite the fact that many were simultaneously negotiating with the landlord of the existing office, over 70% of occupiers decided to move, prior to the upcoming lease expiry. The sector with the strongest propensity to move was media and the least likely to move was business services. The larger a company, the slightly higher propensity to move. West End companies were slightly more likely to move than City-based ones.

The last nine months has seen a strong pace of office space pre-lets set by incoming tenants in advance of construction completion. In total, some 4.3m sq ft of London office space, that is currently under construction, has been pre-let. Some of the high profile recent pre-lets included Boston Consulting, Metro Bank taking 67,000 sq ft of offices at 20 Old Bailey, EC4; Boston Consulting and Arup at 80 Charlotte Street, W1; HSBC taking 30,000 at Cork Street, W1 and Kings College at Roman Wall House, EC3.

The most common trigger for pre-let relocation is expansion. Nearly 50% of the space completed over the previous 6 months has now been let and includes big lettings to likes of Universal Music, Cancer Research, XTX Markets, British Council, Cleary Gottlieb, Schroders and Moneysupermarket.

Looking ahead, our research with thousands of London office tenants suggests a robust level of take-up in Q4 2017, although the increasing attractions of serviced office space and Brexit uncertainty could have an impact in the medium term.

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The Magnificent Seven

A recent report from Savills reveals that for a fourth consecutive year, UK regional city office take-up has surpassed the long term average of 9.1m sq ft. Total take-up in 2016 reached an impressive
9.6m sq ft, despite a year of political uncertainty.

The final quarter of regional office take-up in 2017 reached 2.4m sq ft, the strongest quarter since Q2 2015. Roughly the same level of occupational demand was recorded during the first half and second half
of the 2016, with no post referendum slowdown evident.

The most active of the seven major UK cities in 2016 were Bristol and Cardiff, which recorded take-up improvements of 42% and 10% on 2015’s levels respectively, with Cardiff achieving its highest level of take-up in 15 years. A key driver of occupational demand in these cities was the Government Property Unit (GPU) requirements for consolidating public sector bases into regional hubs. Savills expect the GPU to be the key contributor to acquisitions over 100,000 sq ft in 2017 in cities including Birmingham, Manchester, Leeds, Edinburgh and Belfast, during 2017.

The most active business sectors during 2016 were the insurance and financial services sector, accounting for 1.2 million sq ft (15%) of space taken, which marked a record year. Key deals include: Swinton
Insurance taking 165,000 sq ft at 101 Embankment, Manchester, whilst MotoNovo Finance took 72,000 sq ft at One Central Square, Cardiff.
The tech sector remained an important contributor to take-up during 2016 and accounted for 20% of the number of transactions. This sector has traditionally contributed to the smaller end of the market, but also included Co-op Digital acquiring 45,000 sq ft of accommodation in Manchester, while Micro-chip designer, Cirrus Logic’s 70,000 sq ft letting at Quartermile, Edinburgh marked the largest regional tech deal last year. Edinburgh witnessed the highest proportion of tech take-up of all the UK cities.

Metropolis ran 53 medium and large office requirements for Birmingham in 2016, totalling 1.4m sq ft; the totals for other cities were Bristol 66 requirements and 1.6m sq ft; Cardiff 35 requirements and 1.1m sq ft; Edinburgh 65 requirements and 1.5m sq ft; Glasgow 51 requirements and 1.4m sq ft; Leeds 74 requirements and 2m sq ft; Manchester 90 requirements and 2.5m sq ft.
A shortage of Grade A floorspace in city centres,  prompted occupiers to look out of town as total fringe/out of town take-up reaching 2.8 million sq ft, eclipsing the record level set during 2014. Occupiers were also attracted out of town offices due to availability of larger floorplate stock and cheaper rents, particularly in the Manchester and Glasgow markets. Glasgow was boosted by the University of the West of Scotland’s 225,000 sq ft pre-let of the Eco Campus.

Overall, 44% of the 3.6m sq ft of regional office space currently under construction across the UK regions has been pre-let. Examples include PwC’s part pre-let of One Chamberlain Square in Birmingham
There are 8 million sq ft of known lease expiries over the next five years, there also remains underlying demand for new space, with the likely strongest performers for 2017 predicted to be Leeds, Cardiff and Bristol. There is a shortage of Grade A space, particularly in Bristol and Manchester. Top regional rents remain low relative to Central London.

The Metropolis view is that demand is holding up well in regional cities with 130 new requirements added to the database for the seven largest cities outside London in Q1 2017.

Central London Lettings March 2017

Central London office lettings in March 2017 recorded nearly 1.05m sq ft of deals from 64 mid-large size transactions (5,000 sq ft+) during the month.

The March’s figure represents a rise on the 905,000 sq ft of lettings in February, and brings the Q1 2017 total upto nearly 2.6m sq ft of market activity, close to the recent average.

March was characterised by 13 office deals over 20,000 sq ft, which included Cancer Research’s 100,000 sq ft pre-let in Stratford: the Amazon’s 89,000 expansion at Principal Place in London, E1; ITV taking 88,000 sq ft at Waterhouse Square, WC1 and HSBC taking 31,000 sq ft at 71 Queen Victoria Street, EC4.

Tech and IT services topped the table of lettings by sector, underpinned by the Amazon deal, this was followed by charity headed by the Cancer Research transaction and media with large deals involving ITV and Buzzfeed. Business services also performed well helped by the lettings to Instant Offices and The Space. Office deals under offer in central London remain at 2.1m sq ft.

By area, the City accounted for an improved 40pc of the office floorspace let in March – a doubling of the February level. The West End saw 220,000 sq ft of take-up. Midtown contributed 140,000 sq ft of lettings. Current London office demand is calculated to be around 3.5m sq ft in the City and 3.2m sq ft in the West End.

The volume of grade A (newly built or refurbished office space) let during the month reached 243,000 sq ft (23% of the monthly total), as transactions for new space maintained their recent strong showing.

Cityoffices and Metropolis are shortly to release its twice yearly Skyline report on the London office construction market. The Q1 report features details of the 100 schemes under construction and the trends for the next wave of schemes. Details on Cityoffices from Andy King at andy@metroinfo.co.uk

South Coast steady

JLL has just published its Q3 2016 report on the ‘South Coast Metropole’, covering Portsmouth, Southampton and Bournemouth. The headlines are that prime building office rents reached £21.50 per sq ft; there has been a 6% increase in take up from this time last year and there is a shortage of new office schemes coming through the pipeline. The market has generally stabilised after the initial shock of the Brexit vote.

In Q1 – Q3 2016 there has been a 16% increase in take-up compared to the same period last year. Take-up has risen from from 337,366 sq ft in 2013 to 419,160 sq ft in 2014 and to over 500,000 sq ft in 2015. The largest letting over the last year was Utilita Energy which took circa 52,000 sq ft at Hutwood Court, Chandler’s Ford. More recently Just Develop IT  took 25,000 sq ft at Segensworth; Peach Telecom took 14,000 sq ft at Fareham and One Insurance took 12,500 sq ft at Chandlers Ford.

The south coast remains a popular location for businesses in the defence, technology and financial sectors. JLL point to a trend for larger occupiers moving to out-of-town locations due to lack of suitable new schemes in city centres.

Metropolis is tracking over a dozen companies looking for over 10,000 sq ft of offices in Portsmouth, Southampton and Bournemouth.

The occupational market in the region is being been driven by lease events with companies consolidating into single buildings or relocating to take advantage of newly refurbished, better quality accommodation, often from cellular offices into more modern open plan space.

Speculative office development has been quiet with the exception of one building at Southampton Science Park and in Bournemouth, One Vision is currently under construction as part of a mixed use scheme where offices will be provided up to 83,300 sq ft by 2018. Development sites at Royal Pier Waterfront in Southampton, Lakeside Northarbour in Portsmouth and Chilcomb Centre in Winchester may as a result, see new offices built, as supply continues its steady decline.

Sector Analysis – Serviced Offices

Metropolis has carried out an exclusive research survey into the rise of the serviced office sector since early 2013 in central London. Occupiers tell Metropolis that their need for short leases and flexible space is driving their demand for increasing volumes of serviced office space, especially in London’s increasingly digital economy, where space needs are hard to predict five years ahead. London is already the home to over 800 of the 2,300 serviced office centres nationally and the sector is growing fast. The results below illustrate the rising importance of the sector to office demand in the capital.

Since January 2013 a total of 4m sq ft of offices has been let to serviced office operators in 170 deals over 5,000 sq ft. At an average one workstation for every 100 sq ft in central London, this amounts to space for up to 40,000 new workstations in the last three and a half years.

Serviced office and co-working lettings peaked at 1.7m sq ft in 2015, when they accounted for 15% of London take-up, but if trends for the first 7 months of 2016 are maintained then this year will almost reach the heights of 2015.

sq ft
2013 537,000
2014 875,000
2015 1,700,000
2016 (7 months) 900,000

The most acquisitive groups during this time have been:

sq ft
WeWork 917,000
Office Group 574,000
Regus 436,000
i2 Offices 314,000
Instant Offices 224,000
London Executive 175,000
Ventia 50,000

Much of the interiors work has been carried out ‘in-house’, however there is some evidence of a number of smaller contractors working on the refurbishments of recently acquired space. On the design side a variety of architects have been appointed to advise on revamps including Buckley Gray Yeoman and Morrow + Lorraine.

Looking ahead, Metropolis is tracking around a dozen established serviced office operators such as BE Offices and Orega looking for further centres in London, as well as a number of new entrants to the market, such as Office Space in Town and Pennine Way  looking to expand from a current 1-2 centres. Analysts believe the sector could grow in value to over £62bn by 2025.

Birmingham Summer 2016 Office Market Update

A recent report by Colliers International concluded that central Birmingham city office take-up reached 217,000 sq ft in 40 deals during Q2 2016, which was above the five-year quarterly average.

Birmingham office transactions in 2016 added up to 501,000 sq ft in 76 deals. Network Rail agreed to take 85,000 sq ft over three floors at Baskerville House in Centenary Square; Energy Systems Catapult is to relocate to 18,000 sq ft office space at Cannon House; DAC Beachcroft has signed to take 40,000 sq ft of office space on part third, fourth and fifth floors, at Tricorn House and Monarch Recruitment is taking another 10,000 sq ft floor at Temple Point, 1 Temple Row.

Metropolis is tracking over 30 medium/large requirements in Birmingham, including from searches from the likes of London Midland, Emcor and Zurich Insurance.

Birmingham city core is expected to bring onstream up to 1 million sq ft of new development between 2017 and 2019. Schemes include Stirling Property Ventures and Rockspring 235,000 sq ft at 103 Colmore Row, formerly Natwest Tower. Also 3 Snowhill will deliver 385,000 sq ft of Grade A office space by early 2019.

In the short term the refurbishment of 55 Colmore Row, will deliver 156,000 sq ft of prime Grade A space; the Cornerblock will deliver 110,000 sq ft of Grade A refurbished space in Q4 2016, while Ardstone Capital’s 1 Newhall Street will provide 45,000 sq ft of Grade A space by late 2016.

Cityoffices and Metropolis Skyline Survey Summer 2016

Metropolis and Cityoffices have completed their bi-annual ‘Skyline’ survey of the central London office development market for the period October 2015 to April 2016. The survey takes a snapshot of central London office construction in Q2 2016 and includes recent completions, recent pre-let activity and looks ahead to future pipeline projects that will shape the next three years.

After an unprecedented 48 office scheme starts in the six months from October 2015, there are now 104 office schemes under construction in central London (compared to 78 six months ago) totaling an increased 13.5m sq ft (11.1m sq ft in September 2015). This 22% increase in London office space under construction was forecast in our autumn 2015 report.

Scheme start surge

The 48 new office scheme starts in Q4 2015 and Q1 2016 saw 4.7m sq ft of new office space go under construction, including major new-builds such as the 800,000 sq ft Banking Factory in Shoe Lane, EC4; the 320,000 sq ft ‘Can of Ham’ at 60-70 St Mary Axe in the City of London and the 275,000 sq ft Fruit & Wool Exchange in E1, which is all pre-let to a major law firm.

The proportion of refurbishments in the office construction market in central London has stabilised. There is currently a 17:83 split by floorspace ratio of refurbishments: new-build. High profile refurbishments started since autumn 2015 include: Helical Bar’s 165,000 sq ft The Tower, EC1 and GPE’s 150,000 sq ft 148 Old Street in EC1. A significant number of refurbishments are continuing to enter the market, but in terms of total sq ft are overshadowed by large new-builds.

The City dominates current office construction with 9m sq ft of new office space in schemes now underway (up from 6m sq ft in autumn 2015). There is now 670,000 sq ft of office space under construction in Kings Cross, with more at site clearance stage. The West End, including Paddington, has 2.3m sq ft under construction and a further 1.5m sq ft of office builds are on-site in Midtown and Southbank.

More demolitions poised

Despite the high number of starts in the last six months there remains a lot of schemes at demolition stage. Currently there is 6m sq ft lined up to start in late 2016 and 2017. In reality, with over 100 further schemes currently at planning consent stage, more schemes will add to these numbers, particularly in 2017 and 2018. Therefore we predict annual London office development completions in 2017 and 2018 could reach 7-8m sq ft.

Looking ahead, some 33 future office schemes are currently at site preparation stage with upto 7.2m sq ft of additional office space due to go under construction in the next 6 months. Many of these schemes will not be completed until 2017, 2018 or 2019, for example schemes such as 8-10 Grafton Street, W1 or Marble Arch Place, however it is clear there is a continuing strong development pipeline.

There are 200 office schemes that are in the current planning pipeline which could start construction by 2018 (listed on our Cityoffices website), assuming no major economic downturn. In total, over 35m sq ft of offices could be constructed by 2020.

Two of the largest schemes which are closest to a construction start and likely to see construction late in 2016 are the Commonwealth Building in New Oxford Street, WC1 and the 400,000 sq ft No.1 Thames scheme in WC2. Current trends suggest a London office ‘completions bulge’ in 2017, including nearly 5m sq ft in the City alone. There are a further 200 office planning consents pending, including schemes such as 8-10 Grafton Street, W1; 55 Gresham Street, W1 and 8-10 New Bridge Street, EC4.

Ready for tenants and fit-out?

In terms of demand for new space in central London, some 5m sq ft (4.4m sq ft in September) of the 13.5m sq ft under construction, has already been pre-let. Recent pre-lettings of under construction space include: DLA Piper at 160 Aldersgate Street, EC1; Colt Telecom at 20 Great Eastern Street in EC2; Farm Group at 58-62 Newman Street in W1; Fred Perry at 29 Mount Pleasant in EC1; New Look and XTC Markets at Building R7 in Kings Cross.

Just over 1.7m sq ft of offices were completed in central London over the last six months, however the increased pace of letting activity has led to over half of the space being let either prior to completion or just after. The largest schemes completed included: the 215,000 sq ft Lacon House, WC1 part pre-let to Arriva; the 188,000 sq ft Zig Zag Building, SW1 where space was pre-let to Jupiter Asset Management and TT Moneycorp and the 170,000 sq ft 8 Finsbury Circus, EC2, part let to Rathbone Brothers and Charles River. Some 40% of office space already pre-let will be occupied by financial services and tech sector companies (see last week’s blog on the rise of this sector). Metropolis is currently tracking nearly 10m of named office requirements in central London.

In total, less than 880,000 sq ft of offices are still available in the 22 London schemes and 1.7m sq ft of offices recently completed in Q4 2015 and Q1 2016. Some 20 different tenants have already signed up for space in the newly-completed developments such as St James Market, 77 Shaftesbury Ave and 1 New Burlington Place. There are currently 3.7m sq ft of offices due for completion in Q2 2016 and Q3 2016, of which 1m sq ft has so far been pre-let. Based on recent trends we would expect a further 1m sq ft or more to be let in these schemes by September 2016.

Conclusion

In conclusion, total office development underway in central London should break through the 15m sq ft ceiling in summer 2016, which would set a recent post recession construction record. The projected 12m sq ft of London office take-up for 2016 looks likely to include over 4m sq ft of grade A new lettings within newly constructed and or refurbished buildings. The number of larger companies now looking further ahead, considering pre-let of space not due for completion until late 2016 or 2017, will sustain a similar take-up pattern in 2016.

In effect, the forthcoming pipeline of schemes for 2017-2019, including the next wave of schemes currently at demolition stage, means that opportunities for pre-letting new space under construction and due for completion in the next three years, has never been greater than at present.