We have seen a pre-recession performance from the London office market in 2014, one that is eerily close to 2007. In fact, the stats from the two years look so similar that at first we thought it was a typo.
Take-up, the availability rate and availability by grade are nearly identical, so how is the market different at this point compared to the last peak? And what might that mean for 2015’s London office market?
The diminishing amount of empty space in the capital is a hugely significant marker. We have seen the availability rate drop sharply to 5.59% – the lowest across the capital since the pre-recession peak.
In the past two years businesses from across the world signed up for 27.4m sq ft of office space within the capital. When was the last time we saw an equivalent eight-quarter period for lettings? Just prior to the economic collapse, when Q2 2006 to Q1 2008 saw 27.6m sq ft change hands.
We all know what happened after that. Following that particular boom came a sharp drop-off in take-up as businesses began to show trepidation amid the tumult of global economic meltdown. This time around, if lettings slow down a touch, it will probably have more to do with a continued shortage of supply.
And there are a few other things that are different this time. Going back to that period between 2006 and 2007, the best part of 16m sq ft of office space went under construction, with around 14m sq ft of that speculative in the midst of what was perceived to be a market going from strength to strength.
However, as economic conditions worsened in the subsequent 10 quarterly periods, just 3.4m sq ft of space under
construction was let – leaving a sizeable chunk of that spec development empty. Naturally, the availability rate across London increased from 5.9% at the end of 2007 to 10.3% by the mid-point of 2010, causing rental levels to stagnate.
The equivalent figures for today’s market are roughly half. From 2013 to 2014, 8.5m sq ft went under construction, and 7m sq ft of that is being built speculatively.
What this is likely to mean across 2015 and possibly 2016 is that while we are unlikely to see 2014 take-up matched on a quarter-by-quarter basis, we may see a stabilising of the availability rate across the capital, avoiding that outward drift that occurred last time and safeguarding rental growth, which has again bloomed within London for the past few quarters.
Graham Shone is senior research analyst, offices research, for EGi
graham.shone@estatesgazette.com
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