A rise in pre-letting and the increasing importance of work space in attracting talent were some of the trends in the London office market explored at a panel discussion held by the City Property Association this week.
Michael Cracknell of Deloitte opened by presenting findings from Deloitte’s latest London Office Crane Survey. The survey reports encouragingly high construction levels, little surprise perhaps to those of us whose offices ring to the sound of drills. Between October 2018 and March 2019 13.2 million sq ft of office space was under construction, up 12% on the previous six months and well above the long-term half yearly average of 10.5 million sq ft. The same period saw 37 new schemes, more than launched in any other six months since the same period in 2015/16.
Interestingly 55% of the space under construction is pre-let, marking a steady increase from 41% in 2016. This rises to 78% of space over 100,000 sq ft. TMT, financial services and serviced office provider tenants dominate pre-lets, at 35%, 29% and 8% respectively. Factors driving pre-letting include the scarcity of Grade A space and decreasing developer appetite for speculation. Pre-letting also allows tenants to secure their preferred accommodation well ahead of lease events such as breaks and expiries.
The panel particularly explored how occupiers’ increasing desire to influence design and layout is fuelling pre-lets. Mary Finnigan, Head of Transactions at WeWork, commented on the increased efficiency pre-letting could achieve, allowing WeWork to design to their own specification. This can include high density space, with the impact of that offset by agile working, a trend which is likely to become more common in the future. Karen Cook of PLP Architecture noted that, as quality work space becomes increasingly important in attracting talent, a key concern for those taking space is “how do we support the individual?” We have considered how occupiers’ demands, including around smart and WELL buildings, are changing the real estate market in a previous post.
Pre-lets are particularly prevalent in emerging submarkets, such as Vauxhall-Nine Elms-Battersea, White City and Stratford, where there is limited speculative development. Indeed all of the new office stock in King’s Cross, and 89% of that in Southbank, was committed before construction began. Conversely in the West End only a third of active developments are pre-let, in part due to a lack of large new build stock.
Deloitte expect the rise of co-working and this need for employers to attract and retain talent to keep Grade A office space in demand. For Justin Black, Head of UK Development at CC Land, development decisions are driven by a desire for quality and a pre-eminent location. Conversely, Deloitte see the secondary office market as likely to be more challenging, with rents forecast to fall over the next four years, as against a 2% rise annually for prime office space. As large occupiers free up buildings, smaller occupiers, who traditionally would have taken up this space, are increasingly turning to co-working offices for a better choice of space and more flexible lease terms. Combined with an overall trend for occupiers to need less space, as more employees work from home, this could leave second-hand offices at risk of accelerated obsolescence.