London’s occupiers have vacated the greatest amount of space in 15 years since the EU referendum as net stock absorption fell below global financial crisis levels, research from Seaforth Land shows.
Net stock absorption, which is the difference between occupied space from one period to the next, fell to -3m sq ft in 2016 – below the -1.5m sq ft experienced in 2008.
The first half of 2017 saw a further -800,000 sq ft of losses.
While take-up in the capital has largely recovered, Simon Durkin, director of strategy, research and operations at Seaforth Land, said net absorption tells a negative story that take-up by itself does not.
Durkin, former head of research at BNP Paribas Real Estate, said: “Take-up paints a misleading picture of the current state of the market.
“Take-up will always be positive. It can only ever be a positive number, whereas net stock absorption is a net figure that takes into account the space vacated.”
Using pre-referendum forecasts for a number of factors, including job growth and office stock – which have historically had a strong correlation with net stock absorption (see chart below) – the research estimated that had there not been a major disruption in 2016, net absorption in the year would have been 2.4m sq ft.
The difference between that estimate, the actual 3m sq ft lost and the losses in the first half of 2017 mean London has had a potential 6.2m sq ft shortfall in occupancy, Durkin said.
Can we blame Brexit?
While Brexit was the single largest event to disrupt the market last year, Durkin said there are other factors at play.
“There’s an element of demand that has wilted on the vine. This is demand that won’t be coming back,” he said, referring to increasing urban density, more workplace agility, smaller real estate footprints and automation.
A fall in demand from Brexit could reverse as occupiers gain more clarity about the future, but the shift to smaller, more agile space reflects a fundamental change in the size of tenant requirements.
This trend was also reflected in the latest EG London Office Market Analysis, which shows the City fringe’s average letting size was the smallest on record in Q3.
Despite a number of large deals, including Deutsche Bank’s 469,000 sq ft commitment to 21 Moorfields, EC2, the London leasing market was fundamentally underpinned by small deals, particularly from the tech and media sector.
Durkin added that while some major financial services firms are downsizing in London, that has been a trend for years and is unrelated to the UK’s position in the EU.
“I assume Brexit gives many of these organisations a convenient banner within which to execute some of their plans that were already formulated,” he said.
Is it all downhill from here?
Seaforth Land’s forecasts estimate that net absorption will remain negative until 2020, when it expects a strong bounce back to 2.2m sq ft.
Durkin said: “Brexit uncertainty won’t be alleviated by any single event. This is likely to be a drag on occupier sentiment for several years.”
However, London’s net absorption has historically fluctuated between peaks and troughs.
Sharp rises tend to follow negative periods. Even if numbers continue to be subdued in the coming years, a spike should be expected as a result of demand from growing sectors.
“London has a way of continually reinventing itself,” said Durkin.
“If you look at forecasts for employment growth over the next five years, these are not the same industries that would have appeared as the main drivers of growth five or seven years ago.”
This is why, as EG research shows, there were twice as many TMT deals as financial sector ones in the past quarter. As demand from more traditional sectors flounders, others will emerge to replace them.
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