The central London office market is in a sweet spot of low supply, high demand and rising rents, but there are known unknowns that will complicate the picture
The market is cyclical and yet it still manages to surprise us when things head downwards. Agents describe the current central London office market as being in a “sweet spot” – low supply, high demand, rising rents. On paper, a good time to start building, surely? But isn’t that how the problems begin – a surge in development activity and then a fall-off in demand?
Looking at what is known – we will come to the known unknowns later – what is currently under construction is not enough to satisfy demand if take-up levels in central London continue at around the five-year average of 11.6m sq ft, and that is the case pretty much across all the submarkets.
Back-of-an-envelope calculations show there is about 7.5m sq ft under construction that is not already prelet. This is due to complete between now and 2018 (see timeline).
But there is also 36m sq ft with planning permission which has yet to start.
The known unknowns are how much of that 36m sq ft will actually come forward and how quickly, how demand will hold up, and whether some canny developers may opt for a relatively quicker refurb rather than building brand new – these figures are based on new-build and comprehensive refurbishment.
Is an office oversupply on the cards, particularly in the City core, where most of the space is being constructed and has planning permission, or are the market fundamentals sufficiently different this time around?
“We are still likely to get an element of oversupply,” says Simon Kinnie, head of real estate forecasting at Standard Life Investments. “It takes two to three years to build and 2018/19 is when we think vacancy will be addressed and the heat will come out.”
Andy Tyler, partner, central London development, at Knight Frank, takes comfort from the fact that most developers in London this time around are savvy, long-term players, unlike the last boom, when the banks were free and easy with their money and “any old Tom, Dick or Harry could do development”.
The big players also have stock and development opportunities across central London, which means they can be more strategic about what they bring forward and when. “There will be a shortage of developed product and we will see more and more prelets,” says Tyler.
A potential fly in the ointment could be foreign money. Peter Burns, head of central London development at CBRE, says the evolution of the market for foreign investors is from buying standing stock to development and the market is already swinging in favour of commercial rather than residential on that score. Whether this will equate to a wave of less experienced developers entering the market is another unknown.
Ultimately, it comes down to the occupiers. “If you are really rent-sensitive, then there are limited areas you can go to,” says Burns. Is there a danger they might take flight elsewhere?
What is certain is that the sweet spot cannot last. The market is in a different place, occupiers are footloose, development funding is still constrained, but winners and losers are inevitable.
