2016 set to be a ‘Challenging’ Year for Occupiers in London Office Market

Posted on 29 July, 2015 by Cliff Goodwin

As London’s vacancy rates hit a 14-year low, one of the capital’s leading commercial agents has warned that the recovering economy could push the supply of city offices even lower.

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This year’s second quarter returns show the London vacancy rate at just 4.8 per cent. The only occasion it has been this low previously was between April and June 2000 and during the first three months of 2001 — the peak of the “dot com” mania and its investment banking boom.

“Back then, an unprecedented surge in demand — or competition for space —   reduced supply and choice to very low levels,” says Knight Frank partner, Richard Proctor. “This makes today’s situation interesting, as competition for space is ahead of average but not booming as it was back in 2000-2001.”

The present crunch, he explains, “owes more to a lack of development, due to a combination of the Euro crisis deterring construction starts between 2010 and 2012 and limited availability of development finance during that period.

“The concern for our clients is that should the global economy hit fair winds in 2016, then competition for space could increase yet further,” cautions the partner in the agency’s central London tenant representation.

“Due to the lag time in construction, 2016 is a year in which it is no longer possible to deliver a brand new building, although refurbishments are still an option. The idea that next year the vacancy rate could once again match its 2000 third quarter low of 3.3 per cent looks very plausible.

“And unless the global economy moves into a fresh downturn in the meantime, 2016 looks set to be a very challenging year for occupiers.”

Knight Frank figures show that while developers have recently responded to the shortage in London, the new development supply will arrive later rather than sooner. Between the first and second quarters of this year the company has seen a net increase of 2.5m sq ft in speculative space under construction, but 78 per cent of the new starts will now be completed until 2017 or later.

For 2016, there is 3.6m sq ft of speculative development set to complete, but lettings of new build and refurbished office space in the last twelve months has been 6.3m sq ft in Central London.

Even the 2017 and 2018 pipelines — at 1.5m and 1.3 m square feet respectively — looks thin, adds Proctor. “Therefore, it is paramount that occupiers plan well in advance of a lease event in order to maximise choice, get ahead of the competition and maintain optimum leverage in a ‘landlord friendly’ marketplace.”

He admits that from an occupier’s perspective the figures make uncomfortable reading. However, they do come with the caveat that development activity is picking up. Quarter-on-quarter, the volume of London’s speculative construction is up 34 per cent, with a year-on-year rise of 86 per cent.

“The pipeline still looks inadequate to ease competition for space despite recent increases,” Proctor concludes, “but the development pendulum is definitely on the move and the picture may improve in 2017-19.”




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