At the beginning of 2014 we commented that the medium term prospects for the market would depend heavily on the speed at which the speculative development market reactivated. This is clearly a concern at the forefront of most developer’s minds, and the first half of 2014 has seen the majority of the London specialists stating that they felt that their forward pipeline was full enough for the present. In this issues’ Outlook section we delve deeper into the forward looking demand and supply situation, and examine whether the top of the current cycle is likely to be in three to four years’ time as some commentators are suggesting.
As we have alluded to earlier in this report, the supply-side is certainly reacting to the pick-up in demand and falling levels of vacancy. While the early years of the recovery were characterised by a sharp pick-up in refurbishment activity, the pipeline is now filling up with new-build and redevelopment projects. Indeed, three out of the next four years will see an above average level of development completions across the City and West End, though 19% of this 21 million sq ft is already pre-let (well above normal levels of pre-letting for the central London market as a whole).
The bulk (70%) of this development activity is taking place in the City office market, rather than the very undersupplied West End. Is this a case of right space in the wrong place, or if you build it they will come?
When you look at recent leasing market trends, as well as the tone of current requirements, it is clear that something fundamental has happened to the central London office market over the last five or six years. More than one million square feet of businesses have moved from the West End eastwards over the last 18 months, driven by low vacancies in the West End, more new build space in the City, and perhaps the recognition that for staff attraction and retention central London is becoming increasingly homogenous.
A decade ago our requirements spreadsheets used to be dominated by tenants who were highly specific on what part of central London they wished to be in. Now, the majority of requirements are for central London as a whole, with the top three motivators being public transport accessibility, property cost, and quality of supporting retail and leisure infrastructure. The evolution of the City and Canary Wharf’s supporting infrastructure has now meant that for many workers and employers a move to either location is no longer seen as a bad one.
So, is this just a short term blip or a long-term trend? We believe that it is the latter, and the old boundaries between the City and West End, and possibly the City and the Docklands, will become increasingly blurred over the next 10 years. This blurring will undoubtedly be aided by the completion of Crossrail. What this will mean for the market is that a high vacancy rate in one area will not necessarily be a bad thing, as it will enable tenants to move to that location from other more expensive sub-markets. Thus, the fact that the City is facing a development bulge is probably of less concern than it might have been in previous cycles. No longer is the current level of availability in the City market having to be absorbed by the local market, with an average annual take-up of around 4.5 million sq ft per annum.
Going forward we need to think of the availability and development activity in one particular submarket as a resource for the whole of the central London office market, with an annual average take-up rate of around 10 million square feet. Against that background, the current vacancy and planned development pipeline start to look much more in balance with demand. Indeed, with an estimated one to two million square feet per annum of office stock being converted to other uses, this level of development activity may not even be enough to satisfy a phase of the cycle when London’s businesses are in growth mode.
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