November 3, 2015
Office occupiers are being forced to search further afield from traditional London commercial property centres as the vacancy rate of office space in Central London falls to a 15 year low. According to research from BNP Paribas Real Estate, at just 4.68 percent of total stock, the level of supply during the third quarter of the year was just 10.29m sq ft; equivalent to less than one years’ supply at current levels. Take-up to the end of September reached 10.78m sq ft, 18 percent above the long term trend, whilst the investment volume of £11.91bn is 28 percent ahead of the average. The West End’s office market was boosted by several large transactions involving Media Tech firms and take-up in Q3 2015 reached 1m sq ft, making the third quarter the busiest so far in 2015. The City is still attracting media tech companies, but there’s been a resurgence in traditional City occupiers from the professional sector.
Facebook’s 227,000 sq ft acquisitions at 1 Rathbone Place and Regent’s Place 65,000 sq ft, along with King Digital Entertainments 64,660 sq ft acquisition of Ampersand in Soho’s Wardour Street signalled the West End’s enduring appeal to established Media Tech companies, a trend confirmed by the fact that the sector has accounted for 31 percent of West End take-up so far this year. The Banking & Finance sector accounted for 20 percent of transactions. Despite robust levels of demand for West End offices, annual take-up levels remain marginally below their long term trend, due to the lack of suitable product in the West End. Vacancy rates continued to hover around historic lows with many occupiers struggling to fulfil their property requirements. The vacancy rate stood at 3.79 percent at the end of Q3 2015, equivalent to 2.58m sq ft and 40 percent below the long term average.
The low vacancy rate continued to place upward pressure on rents with new highs being achieved in the submarkets of St James’s, NW1, Paddington and Soho during the first nine months of 2015.
“With robust levels of demand and no further developments coming on stream this year rents are set to increase and occupiers are increasingly looking to future development pipeline to fulfil their property requirements. Increasingly they are turning their attention to non-traditional and emerging locations away from the core areas to satisfy their requirements in terms of space and value,” said Daniel Bayley, Head of Central London at BNP Paribas Real Estate.
“Activity in was very much boosted by pre-letting activity,” says Bayley, adding: “In total 13 pre-lets were recorded totalling 660,000 sq ft. We expect that take-up levels of this magnitude will continue in 2016 as the development pipeline starts to deliver much needed new stock.”
Take-up in the Square Mile was, at 1.53m sq ft, slightly subdued during Q3 2015. However levels to end of September reached 4.88m sq ft, 20 percent ahead of the long term average.
Q3 saw the re-emergence of traditional City occupiers dominating take-up, most notably the professional sector which has accounted for 23 percent of take-up so far in 2015. The media tech sector continued to account for a large proportion of take-up in the City, taking a 19 percent share.
With 14 pre-let transactions so far this year, off plan deals and those agreed during construction continue to be a key feature of the City market and interest remains strong for such opportunities.
The City vacancy rate hit 5.32 percent at the end of September, 132bps below the same period in 2014 and 370bps below the long term trend. BNP Paribas Real Estate expects supply pressures to continue into next year with buoyant demand and average levels of development activity, totalling 2.4m sq ft, keep vacancy low. An upward movement can be expected to occur in late 2016 when completed schemes currently under construction start to enter the supply figures.
While the supply of new buildings in 2017 will be 91 percent above the long term trend, 36 percent of this space has been pre-let and speculative space hitting the market will be closer to 2.85m sq ft, which should prevent any significant hike in vacancy.
Despite a potential slowdown in capital value growth next year, BNP Paribas Real Estate expects that investors will continue to be drawn to the City’s strong rental growth prospects.
The Midtown market saw a quarterly take-up of 673,769 sq ft, representing an increase of 220 percent on Q2. The surge in take-up was largely due the highly anticipated lettings at Aldwych Quarter in August where Bush House, Strand House and King House were let in their entirety to King’s College.
Office supply in Midtown fell to 717,000 sq ft in Q3, down from 1.24m sq ft at the end of June. Letting activity has pushed down the vacancy rate, reducing the vacancy rate to 3.63 percent, well below the 6.50 percent long term average.
With no new space coming to the market due during the remainder of 2015, supply will inevitably contract – placing further pressure on prime rents in Q4.
Northern Fringe (N1)
A lack of larger deals during Q3 saw just 85,519 sq ft of take-up in N1, with two largest deals accounting for 74 percent of the quarter’s take-up. Due to a chronic lack of supply in the area, vacancy rates in N1 stand at 1.39%, significantly below the five year quarterly average of 8.33 percent.
Take-up in Docklands reached 192,068 sq ft in Q3, 67 percent lower than the previous quarter and less than the 10 year quarterly average of 250,000 sq ft. The largest deal of the quarter saw Balfour Beatty taking 35,447 sq ft at 5 Churchill Place.
At 973,548 sq ft supply of offices in Docklands fell compared to Q2, causing vacancy rates to drop by 285 bps to 5.09 percent, the lowest rate witnessed since 2009.
BNP Paribas Real Estate is tracking just 168,460 sq ft of new space set to complete within the next two years. With over 307,000 sq ft of space is currently under offer, the lack of new space will undoubtedly placing upwards pressure on prime rents.