You will be forgiven if during the process of reading this you have an overwhelming sense of déjà vu, as London office market activity between July and September showed some strikingly similar statistical patterns to last quarter’s figures.
Take-up is roughly the same as Q2 – once again propped up by a mammoth individual letting; rents and incentives have barely moved over the last three months; new-build and space under construction continue to drive occupational activity; and there is consistency in the agency disposal league tables, with the winner jumping from fourth last quarter to top spot this time around – exactly the same as what happened in Q2.
Then again, stability of any nature – even statistical – is to be warmly welcomed.
Figures from Radius Data Exchange indicate that just over 3.4m sq ft of office space was let in London during Q3, exactly 38,244 sq ft (1.1%) more than Q2 – the smallest quarter-on-quarter percentage rise we have ever recorded.
However, when compared with the same three months last year, this represents a 7% increase in take-up, and is ahead of the five-year and 10-year quarterly averages by 6% and 18% respectively.
Looking at 2018 so far, the first three quarters have yielded just under 9.5m sq ft of take-up – more than the previous two years at this point, and higher than in seven out of the last 10 years.
In the face of two years of relatively chaotic political events that have threatened to derail the capital’s appeal to businesses, this is a commendable statistic – and one which should serve to breed a certain level of confidence in the capital’s ability to deal with any future headwinds.
It is important to note, however, that a good proportion of that 10-year period came during the global financial crisis, which hampered London’s leasing market in a much more immediate and decisive way than the Article 50 ‘limbo’ we’re currently in.
Looking around London more forensically, there emerges a patchwork of varying submarket performance levels in Q3.
The West End, for example, endured its quietest quarter for lettings since 2009, with just 448,000 sq ft let across the three months – 40% below the five-year average.
Elsewhere, the Docklands market has seen one of its most active periods for some time, with nearly 290,000 sq ft of space transacted – higher than eight out of the previous 10 quarterly figures for take-up.
The star of the show, however, was Midtown – where we saw the largest quarterly take-up we have ever recorded thanks largely to Facebook’s 615,000 sq ft prelet at King’s Cross Central, N1.
That ‘patchwork’ coalesces to give a rolling 12-month take-up which continues the trend seen since the start of 2017 – that letting volumes are continuing to recover after suffering markedly in the immediate aftermath of the referendum result.
There are, however, idiosyncrasies within the take-up stats to give small cause for concern as to how immediately sustainable this trend really is.
For example, the fact that an individual deal has substantially buttressed the figures for the second quarter in a row is worth mentioning – and this time, it is even more of a fillip than in Q2.
The Chinese Embassy deal alone represented 17.3% of London’s overall office take-up across Q2– which, at the time, was the biggest proportion attributed to any single deal since Google in early 2013 – but Facebook’s giant letting at Kings Cross Central has knocked that deal off its perch by accounting for nearly 18% of activity in Q3.
James Hammond, executive director for London capital markets at CBRE, summarises the inflection point at which London’s office market currently finds itself.
He says: “You can paint whatever picture you want on London at the moment, positive or negative – but the occupational market has performed better than was forecast.”
The Facebook letting, in addition to further significant take-up for LinkedIn at The Ray, EC1, and Live Nation at the Farmiloe Building, EC1, ensured that the TMT sector was the most influential occupier type in terms of driving occupational activity – with 38% of all new space let to tech occupiers.
The financial sector saw three deals above 100,000 sq ft propel it to second, with 17% of the take-up share – up from fourth last time, when the largest financial deal was for around 57,000 sq ft.
The largest of those three transactions was for 129,000 sq ft to BGC International at 5 Churchill Place, E14 – which was also a crucial factor in helping the Docklands to a healthy quarter.
Finance has only been the main driver of take-up on two occasions since the referendum result –when Wells Fargo and Deutsche Bank helped boost activity with huge lettings in Q3 2016 and Q3 2017 respectively, much in the same way that Facebook has done for the TMT sector this quarter.
Latest figures from Savills indicate that the lion’s share of current active demand for central London offices is accounted for by financial and insurance operators (30.8%), so it is intriguing to note that the weight of requirements hasn’t manifested itself in recent dominant activity for this sector.
Perhaps those businesses are exercising some caution over their decisions until more clarity is given on how financial service businesses in the UK will interact with their European counterparts in future –the market stats are clearly reflecting this, with an embassy and a tech giant helping to keep the market ticking over while financial occupiers consider their options.
Construction starts on new space in Q3 suggest that this cautious approach is being shared by developers.
Despite take-up being heavily driven by new-build and under-construction space throughout the last two years – and 20.4m sq ft of office space currently at permission across London – construction starts slowed slightly in Q3, with 780,000 sq ft getting underway against just over 1m sq ft in Q2.
The deceleration in development work has meant rolling 12-month construction starts have fallen for the first time in a year, having steadily risen since a dramatic drop off at the midpoint of last year
Of critical importance to landlords is ensuring that development work not only keeps overall availability at reasonable levels during this period of relative uncertainty, but also ensures that London’s markets retain their appeal to broad occupier bases.
Ker Gilchrist, property director at Grafton Advisors, says: “What we need to do as landlords is make absolutely sure that we deliver a property that’s going to tick all the boxes for the occupier sectors that are likely to be attracted to that submarket.
“Rents have probably levelled out because while tenants seem to be comfortable that London is where they want to be moving forward, they want to be cautious about committing until they have identified the right building for them and, more importantly, for their employees.”
The evidence of some landlord and occupier caution being exercised at present goes some way to explaining why the latest figures from our consensus rents panel of agency experts indicate no movement for Grade-A rents across London against last quarter.
Against Q3 2017, however, we have seen annual growth of 0.6%. This is down to the fact that the need to incentivise occupiers was greater last year, as availability rates moved outwards sharply off the back of lower take-up volumes from Q2 2016 onwards, in addition to a sharp increase in second-hand availability.
However, stronger letting volumes this year have not been pushing availability rates downwards to any great degree – which is what one might expect to happen with above-average letting volumes. Further unlet completions, vacancies, consolidations, and upcoming lease events continue to generate additional available space so, as with a lot of London office indicators this quarter, equilibrium reigns.
Ross Blair, senior managing director at Hines UK, explains further how leasing structures have simply undergone small, incremental changes – rather than the drastic undulations seen in previous years.
He says: “Landlords have been willing to give a little bit more flexibility, such as earlier break options, but I don’t think the increased incentives have been material compared to past cycles.
“In those past cycles, you saw almost 12 months of extra incentives being added on City deals within a very short space of time as people got very worried; whereas at present it’s a few months here and there to secure the longest leases.
“That would imply that net effective rents have come down, but it’s around the margins rather than dramatically.”
Radius Data Exchange records just over £5bn as having transacted for London office assets in Q3 – representing a 10% increase on the first quarter and a 28% uplift on the same period last year.
Almost half of this total came via four individual deals: the £1.2bn sale-and-leaseback of Goldman Sachs’ new HQ at Plumtree Court, EC4; the Adelphi, WC2, which sold for around £550m to Amancio Ortega; the £450m-plus deal for Verde, SW1; and the £321.3m deal for Sixty London, EC1.
Outside those big-ticket deals, there was a further £870m transacted in the West End submarket across 15 individual transactions – and another eight sales in the City Core, totalling just under £650m.
So, behind the headline-grabbing deals there has been an undercurrent of activity on smaller lot sizes helping the market tick over. The likelihood is that these types of investment deals will be what propels volumes over the next six months or so, with a relative dearth of prime assets being actively marketed at present.
All of which means we could be set for a quieter six-month period while Brexit details are finalised, allowing investors and occupiers alike to better understand their position.
“Undoubtedly there will a bit of slowdown in the lead-up to March across the investment and occupational markets, unless a dramatic announcement is made soon that gives us colour on what the future holds, which feels very unlikely, so I think we will witness again what happened in the lead up to June 2016,” says Hines’ Blair.
“A number of investors had put Brexit to one side at the beginning of this year, and were just carrying on – right now there are more who are saying they are going to sit back a bit and see what happens.”
CBRE’s Hammond adds: “There will be bumps in the road for the next three to six months, while the sector puts up with a lot of noise and politics impacting transactions, but for equity investors the return in London is still significant compared to other places.”
Cushman & Wakefield hit top spot for London disposals with an overall market share of 39.5% in Q3, helped by its involvement in two of the largest four deals of the quarter – to Facebook at King’s Cross Central, N1; and to Investec at 55 Gresham Street, EC2.
Disposing almost 1.5m sq ft across 45 individual deals helped the agent to climb from fourth position last quarter to first this time.
Jointly acting on the Facebook deal was Savills, which came third with a 23.8% market share, up from eighth place last time and more than tripling its market share from Q2. As well as Facebook, Savills brokered lettings to Nike at Handyside Street, N1, and to The Office Group at Summit House, WC1.
JLL came in second place, up from fifth last quarter by virtue of advising BGC International at 5 Churchill Place, E14; TP ICAP at 135 Bishopsgate, EC2; and acting alongside Cushman in the Investec disposal at Gresham Street, EC2.
The agent secured a 25.2% market share through its 46 individual disposals – a deals volume beaten only by CBRE and Colliers International, which was the most active by this metric with 61 transactions.
The aforementioned City deals that helped JLL reach second place in the overall standings also helped it to a comprehensive victory in the City Core submarket – securing a 60.7% market share, having advised on more than 560,000 sq ft across 25 deals.
JLL was involved in five of the largest seven deals in the City this quarter, including 74,500 sq ft to Hiscox at 22 Bishopsgate alongside second-placed CBRE, and 48,800 sq ft to RELX at 99 Bishopsgate, both EC2.
Ingleby Trice jumped from ninth place in Q2 to secure a 7.9% market share in fourth place this quarter, helped by its disposal of 18,450 sq ft to White & Case at Austin Friars House, EC2.
A fifth consecutive victory for Colliers International in the City Fringe submarket was achieved by acting on just under 184,000 sq ft – a 35.7% market share.
Among the most important transactions in its victory was the 35,700 sq ft deal to Macmillan Publishers at The Smithson, EC1; and the 17,000 sq ft letting to WeWork at Minerva, EC1.
The other four members of the top five acted on the two largest transactions in the City Fringe market, but the sheer volume of transactions brokered by Colliers International helped it to retain the title.
Cushman & Wakefield and Knight Frank jointly let 82,900 sq ft to LinkedIn at The Ray, EC1, while JLL and BNP Paribas Real Estate joined Cushman in disposing of 64,700 sq ft to Live Nation Entertainment at the Farmiloe Building, EC1.
JLL secured its second submarket victory of Q3 in the Docklands, achieving a 47.4% market share in the most active Docklands market for take-up since 2016.
Critical to this was the 129,000 sq ft deal to BGC International – helping JLL to pip Knight Frank, CBRE and Squarebrook to top spot. Those three agents jointly acted on the second-largest Docklands deal of the quarter to the Competition and Markets Authority, which took nearly 113,000 sq ft at 25 Cabot Square, E14.
Cushman & Wakefield took top spot in Midtown, with fellow Facebook broker Savills coming in second place.
Those two also jointly disposed of 63,353 sq ft at Handyside Street, N1, to Nike in what was the second-largest Midtown deal of the quarter – but crucially for Cushman & Wakefield, its involvement in the 34,400 sq ft letting to HubHub at 20 Farringdon Street, EC4, gave it the edge in this quarter’s league table.
CBRE jumped from 10th place last quarter to third in Q3 thanks to its 14 individual deals in this submarket – more than any other agent – the largest of which came at 15 Fetter Lane, EC4, to Marks and Clerk in a 20,800 sq ft deal jointly disposed by Savills.
Union Street Partners retained its Southern Fringe title from last quarter, securing a 54.2% market share through 16 individual transactions – more than double the volume of deals struck by any other agent in this submarket.
It acted alongside CBRE and JLL in disposing of 26,100 sq ft to WeWork at South Bank Tower, SE1, as well as 17,400 sq ft to South Western Railways at the same location.
The biggest deal in this submarket was for 40,000 sq ft to Datamonitor at the Blue Fin Building, SE1, disposed by third-placed Cushman & Wakefield.
CBRE held onto its West End title from Q2 with a 30.1% market share, achieved through 152,000 sq ft of disposals across 13 individual deals, in what was the quietest West End market for transactional activity since 2009.
CBRE let just under 41,000 sq ft to WeWork at 123 Buckingham Palace Road, SW1, alongside JLL and Knight Frank in what was the biggest deal in the West End in Q3; and also advised on the second-largest – 36,800 sq ft to Vodafone at 1 Kingdom Street, W2.
Cushman & Wakefield came in second place, helped by its involvement in jointly disposing of 20,700 sq ft to Hellman & Friedman at the Brunel Building, W2, with CBRE and Pilcher Hershman.
LONDON OFFICE INVESTMENT LEAGUE TABLE Q3 2018
Having advised on over £2.1bn of transactions in Q2, Eastdil Secured took top spot in the investment league table with a 19.2% market share.
It advised on the £1.2bn sale of Plumtree Court, EC4, along with CBRE and JLL, which placed second and third respectively. Eastdil also acted alongside Knight Frank on the disposal of Adelphi, WC2.
CBRE acted on two acquisitions for Deka this quarter, which helped it take second place – namely the £455m acquisition of Verde, SW1, and the £86m Cursitor Building, WC1 – both of which were jointly acquired alongside Savills.