The New Year has certainly heralded a new feeling of confidence in the London office market. But is a resurgent market necessarily good news for office occupiers?
With low vacancy rates looking set to continue in 2020, and increasing demand putting upward pressure on rents, our view is that it is more important than ever before to think ahead when planning your next move, and ensure you are making the most effective use of your office space.
A new sense of confidence
Investment in the central London office market soared in December, even more so than the usual end of year flurry to get deals done, following the decisive general election victory of the Conservative Party. Agents have attributed this bounce to the fact that investors now have greater clarity on both the legislative agenda and the Brexit roadmap.
According to CBRE, £4.9bn was invested in the final quarter of last year, up 125% on Q3 and on par with the last quarter of 2018. Of this, £2.55bn was transacted in December alone. However, the uncertainty that reigned throughout the rest of 2019 meant that total investment volumes for the year were £11.3bn, a drop of 36% on the previous year and the lowest level since 2011.
Even so, agents are predicting the recent heightened levels of confidence have set the tone for a more buoyant market in 2020.
Increasing demand for quality office space
Looking ahead to 2020, CBRE predicts that while employment growth will be lower in the overall economy compared to 2019, office-based employment will grow faster than total jobs, driven by the strength of the professional, administrative services and technology sectors. Within this, London is expected to grow slightly faster than elsewhere.
As a result, demand for high-quality office space is set to increase in 2020 and businesses are expected to increasingly use real estate as part of their recruitment and retention strategy in a tight labour market.
With the war for talent expected to be a significant feature of the office occupier market in 2020, against a backdrop where the supply of space remains low, the conditions are in place for upward pressure on rents.
JLL points to market uncertainty as having been a major factor in eroding the speculative pipeline of new office space, leading to a steady increase in prime rents in the City of London. According to JLL, City prime rents are now £75 per sqft, with premium floors and buildings surpassing £85 per sqft, and is predicting rents could soon reach £90 per sqft for the best in class space.
In the West End, JLL also predicts a flight to quality with occupiers increasingly willing to pay premium rents for the best space, particularly when coupled with proximity to the new Elizabeth Line which is planned to open next year.
How should occupiers respond?
In conditions where demand is increasing and supply of office space remains tight, we advise occupiers to think well ahead when planning their next office move.
For many businesses approaching a lease expiry, it’s important to recognise that there are now fewer opportunities out there, with vacancy rates in London below their long-term average. This means that it will now take longer than you expect to find the next office space that is right for you.
But this issue can be solved by simply planning further ahead. Nowadays, we recommend to our clients looking for spaces under 5,000sqft to start their decision-making process at least 6 months before lease expiry. For properties between 5,000-15,000sqft we recommend starting up to one year beforehand and, for bigger properties, an 18 month time frame is recommended in order to provide the widest choice available.
As the upward pressure on rents increases, tenants need to carefully consider how they are utilising their office space - whether the office is correctly configured to their working practices, or whether they have the optimum mix of floor space attributed to meeting rooms, informal spaces and work areas.
No matter where you are with your decision making, Cityspace can help you make the right decisions when it comes to your next office move or ensure you are utilising your existing space in the most productive way. To find out more, please contact the team on info@cityspacemanagement.co.uk.
