Richard Proctor, Partner, Central London Tenant Representation at Knight Frank discusses the lack of choice for occupiers and the way in which developers are now responding to this:
The second quarter has seen the vacancy rate (available space to let) drop to 4.8%, marking a fourteen year low.
Since quarterly records began in the early 1990s, the vacancy rate has only ever been at or below 4.8% during the period Q2 2000 and Q1 2001, which was the height of the ‘dot com’ mania, with an accompanying investment banking boom.
Back then, an unprecedented surge in demand (or competition for space) reduced supply (or choice) to very low levels. 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 on property options 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. 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 Q3 2000 low of 3.3% looks plausible.
In short, unless the global economy moves into a fresh downturn in the meantime, 2016 looks set to be a very challenging year for occupiers. While the developers have recently responded to the shortage, the new development supply will arrive later not sooner. Between Q1 2015 and Q2 we have seen a net increase of 2.5 m sq ft in speculative space under construction but 78% of the new starts will complete in 2017 or 2018.
For 2016, there is 3.6 m sq ft of speculative development set to complete but lettings of new build and refurbished office space in the last twelve months has been 6.3 m sq ft in Central London. Even the 2017 and 2018 pipelines look thin, at 1.5 m and 1.3 m sq ft respectively(1). 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” market place.
The above, from an occupier’s perspective makes for somewhat uncomfortable reading but it comes with the caveat that development activity is picking up. The volume of speculative construction is up 34% quarter-on-quarter, and 86% year-on-year.
At the time of writing the pipeline still looks inadequate to ease competition for space, despite recent increases; however, the development pendulum is definitely on the move and the picture may improve in 2017-19.
(1) These figures for 2017 and 2018 reflect the total amount of space currently under construction. These figures are anticipated to rise as further development, principally refurbishments, start construction.
