Pre-letting is set to remain a vital component of the UK office market for both occupiers and landlords but, with supply levels falling, tenants are being forced to look further in advance for quality space that fits their needs – four to five years in some cases.
This is according to the latest research from Cushman & Wakefield: The race for space, pre-letting’s impact on the UK office market.
The report shows that since the global financial crisis, the UK’s commercial property market has undergone significant systematic change. Since 2009, there has been a significant decline in the delivery of new office space.
However, occupier demand has remained robust, even following the EU referendum result, and businesses have remained focused on securing the best solution to their long-term real estate needs. This has resulted in a growing appetite for pre-letting. Over the last 10 years a total of 24.4 million sq ft has been pre-let across Central London, amounting to 267 transactions, and most of this (57%) has been in the City.
Chris Dunn, Senior Insight Analyst and report author, commented: “London continues to be a destination for a diverse profile of businesses who are dedicated to a presence in the capital for many years to come. High-profile occupiers have committed very publicly to its strength. However, with delivery of new office space falling, we are seeing a new kind of space race play out. To stay ahead of the game pre-let occupiers will increasingly be forced to look even further ahead of time to secure high quality space; this could be four to five years for large transactions.”
Beyond London
Outside of London, the pre-let market has largely been driven by consolidation requirements from the Government following the implementation of the Government Estates Strategy 2018. Cushman & Wakefield anticipates that the ongoing relocation of the government estate out of London will place increasing pressure on the development pipeline, causing corporate tenants to look even further into the future to secure their real estate options. The relative lack of supply in the regional cities has increased the proportion of pre-letting since the beginning of 2017.
Rob Yates, Partner and Head of Cushman & Wakefield’s Manchester Office agency team commented: “After a record breaking year of 1.75m sq ft take-up in 2018 in Manchester, the momentum has carried into 2019. With total Grade A supply falling to just 150,000 sq ft, it is anticipated the majority of this space will be let in the first half of the year, two new schemes are due for completion in 2019 which will deliver a much-needed supply of circa 300,000 sq ft. With the constraint on supply we expect headline rents for Grade A product to push onto £35.00 per sq ft in the near future.”
‘Flexibility is king’
When asked about their occupational strategy, occupiers overwhelmingly referenced the term ‘flexibility’ in the context of their selection criteria, both in terms of lease length, but increasingly in reference to options to either decrease or increase commitment to space in the run-up to practical completion. The survey, part of the Race for Space report, found that occupiers also want to be able to adapt space over time as their business needs change or workplace trends evolve.
Co-working is also anticipated to have an impact on the pre-letting market with occupiers now faced with another option which allows them to wait for the right building or space to come along. Flexible workplace providers have had a significant impact on the Central London market over the past four years, providing occupiers with a more realistic interim option.
Patrick Scanlon, Head of UK Offices Insight commented: “It will not be enough for landlords to deliver greater volumes of space; their strategies will need to evolve to the ever-changing needs of the occupier. Flexibility, in every sense of the word, is central to the success of future office schemes offering pre-let, alongside the provision of amenities and services which mean employees have the best possible working environment.
“Flexible workplace providers could be viewed as a threat to pre-letting, however our view is that these operators provide opportunities for landlords to create partnerships, or improve their own flexible offering, giving existing and new tenants a brand-new service that meets their changing needs.”
