It is that time again! Our team have gathered the data, reviewed it over coffee and now bring to you our latest report, Enjoy!
What you will find in this report.
· Central London Overview
· Market Rents
· Take up on Office Space
· Vacancy Rates & Availability
· Sales Market
· Construction Pipeline
· Flexible Office Market
· Industry Analysis
· Simon Says
Central London Overview:
As the long awaited Christmas break ended, by which time we were firmly in the hold of the 2nd or 3rd lockdown, depending on how you look at it, it really was starting to feel like the longest winter ever experienced. As we pushed into January, which is always a tough month under the most normal of circumstances, this January felt even darker than normal for most people, as by this point the pandemic had been with us for the best part of 9 months. Also mixed with the prospect that the lockdown had some way to go, the longer nights really started to feel pretty grim and no amount of Netflix was lighting the way in the gloom. Regardless, everyone really dug in as we wondered what the year and the future would now bring, and the light really did start to come through as all the markets prepared to emerge out of lockdown. You could really begin to feel the general attitudes of companies across all sectors changing, and as we moved into February and March the sentiment improved, and occupier commitment began to spring up and transactions across London started to emerge again.
With a renewed sense of positivity, but still not that much transactional evidence since the beginning of the pandemic, it was quickly becoming clear that there were very different and varying views about where values really sat. With an ever-building mountain of second-hand space, but with it the lack of good quality products throughout the key markets, it seems highly likely that the gap between the much talked about two tier market, will really start to show. Beyond this there are other forces at play such as the future of leisure and retail, the future of serviced (will it collapse or wont it?), and of course the rising star of the CAT A+ movement, which is now quickly becoming a staple diet of the sub 3k sq. ft. market — but could it spread into larger spaces? We will see but one thing is for sure, things feel a whole lot more positive and with the days becoming longer, there are definitely reasons to be encouraged.
In the core West End we saw a 1.3% fall in average rents since Q4 2020 and a 4.6% decline in comparison with Q1 2020. This is reinforced by SHB’s latest regear deal completed for Egerton Capital in Mayfair (Stratton Street) which saw a reduction of £7.50 per sq. ft. from passing rent to a new headline rent (better than the average market fall) + rent-free package far above market over a 10-year lease with 5th year break.
Despite the increase in availability, the City has only shown a 0.4% reduction in average market rents from Q1 2020 to Q1 2021 but the incentive packages on offer within those submarkets far outweigh anywhere else. There has been a significant fall in rent in the Midtown and Kings X areas in comparison to this time in 2020, indicating a 5.1% and 4.1% drop respectively. Perhaps SHB Real Estate’s most active submarket at the minute is the City Fringe market which has shown a 2.6 % fall in rents in the same period as last year. Watch this space for our next quarterly report where there will be some evidence from deals completing.
SHB Real Estate maintain that it’s still going to be a bumpy road in the market but the data clearly indicates that rental values are holding firm for the time being and taking advantage of the pent-up demand (see take up) and we will be in a position to share those outcomes next quarter.
Take up of office space
In the first 3 months of 2021, take up of office space across Central London rose by nearly 30% compared with the Q4 2020 figure of just under 900,000 sq. ft. There were some sizeable deals across London that lead to this increase, notably the 88,500 sq. ft. TikTok deal at Kaleidoscope in Farringdon and a pre-let to legal firm Latham & Watkins at 1 Leadenhall (199,000 sqft).
To mention some of our key deals during Q1 2021 including Kuvari Partners taking 3,900 sq. ft., Circulor taking 3,800 sq. ft. and One Retail Group taking 2,500 sq. ft. respectively. To compare this with last year’s key transactions these included the likes of acquiring 3,850 sq. ft., 2,150 sq. ft. and 2,000 sq. ft. on behalf of Cardiff Tankers, Pixeled Eggs and Red Door Furnishings.
Whilst the pandemic has made companies think twice about what type of space they need and how much space they may need, transactions have continued to take place and lease events continue to be addressed. Taking a look across the wider market it appears that the major transactions that tend to exceed 100,000 sq. ft. have slowed down or re-evaluated their strategy over the last year, however many of the smaller transactions between 2,000–10,000 sq. ft. are still taking place as lease events still need to be addressed.
This may seem encouraging but it is still a way away from 2019 levels but with the pent up demand being seen all across London, and those occupiers beginning to come out and look at space, we expect the take up to significantly increase as we go into the middle of the year. Unsurprisingly the City and City Fringe led the way in terms of submarket take up. The West End has had a couple of noticeable deals at Rolling Stock Yard and 34 Bow Street (not core West End but still) but the next quarter looks bullish with nearly 1m sq. ft. of space currently under offer.
Vacancy Rates & Availability
We have seen a steady rise in vacancy across all submarkets from its YOY average in 2020 with one exception. Typically, undersupplied Kings Cross and Euston, saw a 0.6% reduction in vacancy from 2.1% in Q1 2020 to 1.5% in Q1 2021. On the contrary, the largest increases were found in the City Fringe of 5.6% in 2020 to highs of 9.2% in Q1 2021. Other areas such as Midtown saw 3.3% increase YOY and The City, 3.5 YOY.
Much like vacancy levels, availability has equally suffered, if not more so. With all submarkets showing increased availability levels when compared to their YOY average. The largest increases are found in the City and Hammersmith/ Chiswick submarkets. With the City availability levels rising in Q1 2020 from 8.5% to 14.9% in 2021. Compared to Hammersmith/Chiswick levels in 2020 of 13.8%, compared to 18.1% in Q1 2021.
Rather unsurprisingly, when comparing YOY averages for both vacancy and availability it makes for stark reading. The quickest way to combat these rises are through a renewed confidence in the market with an increase in take-up — Office take up remains subdued. The initial roll-out of a vaccine provided hope for the economy and the property sector, yet vaccine delays, coupled with variant outbreaks, have dampened this hope as these delays continue to prolong a return to normal for office users.
For capital markets, 2020 ended stronger than many expected. However, the start of 2021 was quiet, with a total of £1.3bn invested across 28 transactions in Central London. From a statistics point of view, this was 70% decline on a quarter-on-quarter basis, and 58% down on a 10 year average for the 1st quarter.
The largest transaction of the quarter was Wing Tai Properties Group with a Consortium of Hong Kong buyers purchasing 66 Shoe Lane, EC4 for £158 million. In addition, there were 4 transactions greater than £100 million during the quarter, in line with the corresponding 2020 quarter.
In terms of the type of buyer, travel restrictions continue to limit oversea investors. In Q1, 38% of investment activity purchasers were from the UK, 24% were from Asia and 20% European.
Q1 2021 has seen a few 2020 completion projects tip over into the new year due to the slight lag created by the pandemic, however just shy of 7m sq. ft. developments will be under construction during 2021 as a whole. Out of these, approximately 1.7m sq. ft. of space will be brought to the market with the largest of these being the wholesale refurbishment and add on of HYLO, previously known as Finsbury Tower, in Bunhill Row just to the north of the City. This 29 story tower will consist of 285,000 sq. ft. of space. With rents for best in class space remaining resilient, it will be interesting to watch the types of occupiers who plump for this great looking product. Due to its location and the TMT sector being the most dominant in taking space, this looks primed for being a tech tower but we shall see.
In the West End, notable developments such as Lazari’s The Lantern near Warren Street and GPE’s Oxford House on Oxford Street are scheduled to complete later this year. All these new developments will be hoping that the market continues to bounce from the current pent up demand set up as occupiers look to implement their longer term return-to-work strategy.
Flexible Office market
London’s flexible office market has accelerated in recent years and often accounts for a significant portion of annual take-up. In 2020, the sector accounted for 21% of take-up, second only to finance and banking (28%).
2020 saw the demand for office space take a tumble like no other seen in predating recessions. The flexible office industry typically thrives off uncertainty and as such has previously been able to find opportunity in most recent economic downturns. While that statement is still true, there has never been a recession before when it was actively encouraged, if not enforced to avoid an office environment.
Not all providers of flexible office space have survived as we saw Breather go into liquidation and close all UK sites. However, by the CEO’s own admission the Breather model may have always been a flawed one and potentially not sustainable for this world, pandemic or not. Breather were not the only unfortunate ones with a number of smaller providers in regional locations also throwing in the towel and continuing to do so.
It wasn’t all bad news with plenty of acquisitions and expansions with The Office Group, backed by Blackstone due to launch 3 new buildings in Q4 2021 and Q1 2022. Additionally, Glasgow born Clockwise Office is rising through ranks with 7 new locations due to open in 2021, one being in London.
On the other side of the coin SHB completed on 9 flex deals in the first quarter of 2021 with the average number of deals increasing month on month so far. While each submarket varies the common theme among providers is to opt for front loaded discounts. Discounts of up to 50% on 3–6 months on a standard 12 month term are being applied with the view that as the client nears the end of their contract they will be paying full asking rate, the hope being that towards the end of 2021 demand for flexible office space has continued to increase and therefore set a higher price point.
As predicted in our Q4 snapshot, the resilience of our great financial, legal & tech/media sectors continues. With professional services leading the way for office take up in Q1 followed closely by TMT. The larger deals include law firm Latham & Watkins huge pre-let of 1 Leadenhall, IDRC’s c.46,000 sq. ft. acquisition of Juxon House, Alliance Bernstein’s move away from Mayfair taking upwards of 50,000 sq. ft. at 60 London Wall and of course, the ever-popular TikTok (which most over the age of 10 hadn’t been introduced to until Lockdown 1) taking 88,500 sq. ft. within Kaleidoscope.
It is no surprise then, that the hiring in the Finance, Legal & Tech sectors are all on the rise, boosted across the board by the roll out of the governments road map to freedom released in Q1. Bloomberg reporting that job vacancies within Finance alone are up 70%. This is superb news for the City of London, whilst recently the West End has taken the limelight with the return to non-essential retail & al-fresco dining in the streets of Soho.
Sectors to watch
Equity investors have again shown great confidence in UK businesses this past quarter. Continuing a similar trend to above, the sectors receiving the highest amount of investment is the Fintech sector, followed by AI and then unsurprisingly Life Sciences. The sector that dropped off this year after a complete breakthrough & great run of performance in 2020 was Digital Security, however I am sure we will see this change in the coming quarters.
London broke a record for the number of equity fundraising deals completed, with a total of 313 (accounting for 48% of UK deals) raising a sweet £3.5bn which casts a nice shadow on Q1 2020’s result of £1.95bn and surpassing the last record of £2.82bn which was pre-covid in Q2 2019.
The biggest equity deals completed this quarter including challenger bank Starling Bank & our very own client Checkout.com.
There is a lot more to be positive about, but under the prolonged cover of Government intervention, we are all in danger of thinking that in there is not a lot further to go. With the trauma of the last 12 months, will come further market and social reactions and as financial years are settled and particularly with furlough tapering off, there is likely to be a rise in further redundancies as we really get a good look at how bad the damage has been on the national economic landscape. This will unfold in its own time, but certain realities need to be realised and they include a bit of honesty about the commercial market.
To begin with, although quoting rents have held firm, other than at the highest end in core markets, the overall value in the deals being done are significantly lower than they were 12 months ago. This means we are in a downward market and this downward movement covers both the rents and associated incentives. Not only that, but the term of leases have undoubtedly become shorter and this begins to ask very serious questions about the medium term future of serviced offices. The relevance of this can be seen if we consider what makes serviced and/or managed attractive in the first place, and this would be:
1) Flexibility of term;
2) Fitout/quality of building or/and space;
3) Speed of transaction.
With lease term lengths coming in and becoming more flexible, the rise of CAT A+ and short form leases/licenses becoming more normal, the USPs of serviced and managed are becoming less clear. That, mixed with the fact that conventional deals are becoming more occupier friendly and that the serviced providers are locked into a model where their own headline levels were agreed in hotter markets, it potentially paints a fairly bleak picture and the providers that own their own product who are more in control of their own destiny, may well rise to the top pretty quickly as other providers being underpinned by their own leases with landlords will really suffer to keep up with the market. Again, we will see.
Looking forward, there is also a build up of lease activity as a result of the multiple lockdowns as companies either have imminent lease events, or they pulled out of the office market and now want to reintegrate. It then stands to reason that there is likely to be a healthy spike of activity and we should all make the most out of it. Going forward, the office markets have ALL the ingredients for a textbook ‘dead cat bounce’. After this, could be the part of a market cycle we should all fear, and that is a period where the market is not entirely dead, but it does stagnate and in London there are a lot of agency mouths to feed.
For free advice, lets talk: www.shbre.co.uk