Is an office market recovery beyond the industry's reach?

LOMA Q1 2017: With a tumultuous 2016 still a vivid memory and a slow start to 2017, does the London office market have what it takes to bounce back? Or will an increasingly political environment and a snap election throw a spanner in the works?

Take-up in London slumped to 2.5m sq ft in the first quarter of 2017, down by 28% on Q4 2016 and by 18% on the same period last year, according to EG’s London Office Market Analysis, with just three significant deals representing more than a fifth of total take-up and the ever-growing tech and creative sector almost a third.

Why has take-up fallen and availability risen? Why are occupiers wielding more influence than ever before? And what’s happened to the finance presence in the capital? EG analyses the data.

Graham Shone, senior analyst at EG, talks through the key drivers for the market in the first three months of the year, from the overseas investors driving the market, performance by sub markets, to falling finance occupiers and who might take their place.

Presented at EG’s London Office Market Analysis on Thursday 4 May.

TECH TAKE-UP

The tech and creative sector accounted for more than 620,000 sq ft of take-up in Q1, some 29.6% of all deals over 2,500 sq ft. This was some 34% more than the professional sector in second place.

The financial sector, once the driving force in office occupation in the capital, saw its take-up figures fall by 63% on Q4 with no deals bigger than 31,000 sq ft. While Q2 could be boosted by Deutsche Bank if it agrees to take more than 400,000 sq ft at Land Securities’ 21 Moorfields, EC2, fears persist about financial occupiers moving out of the City because of passporting rights and the UK’s position in global finance.

AVAILABILITY

Availability rates across London rose by 20.6% quarter-on-quarter to 6.97% – the highest rates have been since Q2 2014.

Although supply was up in every part of the city, it was almost double the average in the Docklands where the rate rose by 40% to 10.63% as new space was constructed. There was almost 11 times as much new unlet space in the area in Q1 as there was in Q4, totalling 260,686 sq ft, while the amount of available space under construction grew by 54% to 644,729 sq ft.

But for David Perowne, senior director of London leasing at CBRE, the performance was more a reflection on a productive end to the year than a depressing first quarter.

“Across London, we saw a huge amount of deal activity towards the back end of 2016, and the vast majority of those deals transacted within that quarter, which is quite unusual,” he said.

“Normally you would expect some transactions to slip into Q1 of the following year, but that didn’t really happen this time. So we were almost starting from scratch at the beginning of the year.”

And despite the slow start, the London market is expecting a gradual recovery to reveal itself over the coming quarters.

INVESTMENT

While investment, at £3.3bn, was down by 29% on Q4, it was only 3.6% down on the same period last year and outperformed the average level of first quarter investment since 2013 by 16%.

“The market is undoubtedly being supported by and driven by overseas investors,” said Martin Lay, head of city investment at Cushman & Wakefield, pointing to deals like the £1.2bn sale of British Land and Oxford Properties’ Cheesegrater, EC3, to Hong Kong’s CC Land.

More than half of all investment in the City was by Asian investors looking for core trophy assets, which contributed to 12 deals of more than £100m.

TAKE-UP

For a glimpse of the take-up prospects for Q2 and beyond, space under offer but not yet agreed reached 1.6m sq ft in the first quarter, almost double the 839,841 sq ft under offer in Q4 and largely level with Q1 2016.

And the trend is especially evident in the City Fringe, with more than double the amount of space under offer in Q1 than in Q4.

Shaun Simons, director of city fringe at Colliers International, said: “By around September or October this year, it will be very difficult for any tenant to acquire 20,000 sq ft with immediate occupancy because almost everything will be under offer or let at that stage.”

Given the slow Q2 and Q3 in 2016, agents across London are awaiting much stronger year-on-year performances in 2017 and the consensus is that the snap election is June is unlikely to change that.

DEALS

Deals are not being delayed and occupiers are not yet freezing their searches and with just six weeks between prime minister Theresa May calling for a vote and the election, the market is not expecting a slowdown in activity, particularly with a conviction that the Conservative Party will retain or strengthen its majority.

Dan Gaunt, head of city agency at Knight Frank, said: “It is such a short period of time that people will still go about their business. If we have a massive shock horror in the election, it is not too late to unravel it. But people can certainly take things forward to the point that they are ready to transact.”

TOP FIVE DEALS Q1 2017

The Angel Building, 403 St John Street, EC1

Principal Place, Norton Folgate, Shoreditch High Street, EC2

Business	Sector	Address	Sub-market	Space let (sq ft)	When taken	% of total take-up, Q1 2017
Freshfields Bruckhaus Deringer	Professional	100 Bishopsgate, EC3	City Core	256,521	February 17	10.2%
Expedia.com	TMT	The Angel Building, 403 St John Street, EC1	City Fringe	136,657	February 17	5.5%
Arup Group	Construction	80 Charlotte Street, W1	West End	133,600	February 17	5.3%
Amazon.co.uk	TMT	Principal Place, Norton Folgate, Shoreditch High Street, EC2	City Fringe	89,343	March 17	3.6%
ITV	TMT	Waterhouse Square, 2 Waterhouse Square, EC1	Midtown	88,801	March 17	3.5%

So, while 2017 may not be quite as bumpy as 2016, the muted start to the year may have the market push aside any dreams of an earth-shattering rebound, and instead focus on a calm and gradual shift toward recovery.