April 13, 2013
A new report from DTZ has outlined the ways in which the City of London property market is changing in response to occupier demand. As has been revealed in previous recent surveys, one of the most significant factors is a shift in focus away from the City’s traditional financial services heartland towards the technology, media and telecoms (TMT) sector. Other structural changes include greater demand for different types of facilities from law firms as the legal sector adjusts to developments in its own market. The broader base of tenants and the expected economic upturn will mean a gradual improvement in demand although the report concedes that even by 2017, the market will not have returned to its peak.
The City of London Occupier Demand report explores changes in the financial sector including changing regulations and the effects of the economic downturn and the consequent changes in demand from occupiers. Ben Burston, Head of UK Research at DTZ and joint author of the report comments: “For both landlords and investors in the City office market, the financial sector has traditionally been the dominant source of occupier demand for space. Take-up by the financial sector fell sharply in 2008, and while it was very strong in 2010 it has generally been well down in the aftermath of the crisis. DTZ forecasts financial sector take-up to average 1.3m sq ft over the 2013-17 period. This compares with an average of 1.7m sq ft for the past decade, itself well below the average for the past 25 years of 2.8m sq ft. So financial sector take-up for the next five years will be significantly below the level experienced over the past decade.”
The report also concludes that there will be a concomitant shift in demand in other sectors which is already under way, with the proportion of space taken up by firms in insurance services, the legal sector seeing a comparative rise in demand. The greatest uptake has been from firms in the TMT sector however. In 2012, TMT firms accounted for the largest proportion of take-up in the City (23 per cent). By contrast, finance and insurance occupiers accounted for 17% and 21% of take-up respectively. TMT take-up has been distributed across Central London, with the largest share (44%) in the City.
Demand in the legal sector is largely dependent on the strength of London’s financial sector, and the wider economy but is also driven by changes in the legal sector including the commoditisation some services following recent legislative changes. Legal sector take-up peaked in 2007, when circa 1.2m sq ft changed hands and reached a low point in 2011 when only 200,000 sq ft was transacted. Recent take-up has been driven by lease changes and firms seeking to reduce their costs by consolidating the office space demands.
Martin Davis, joint author of the report, comments: “Looking forward, the DTZ outlook for take-up is for a similar level of take-up in 2013 (4.1m sq ft) as in 2012. We anticipate a modest rise in 2014 to 4.4m sq ft, followed by a largely unchanging level of take-up to 2017. As such, average take-up between 2013 and 2017 will be 4.4m sq ft, below the historic average level of 5.2m (1984-2012). Accordingly, the financial sector share of take-up is expected to fall to 30 per cent, but at this level it will still be the most significant source of demand. Conversely, the TMT and other professional sector shares to rise to 17 per cent of take-up, with the insurance and legal sector shares also rising to 14 per cent and 12 per cent respectively. Also significant is the stronger growth forecast for Midtown. Historically, prime rents in Midtown have been below those in the City, but with a very limited supply pipeline, lower availability and strong demand from TMT occupiers, we expect rents to overtake those in the City.”