London’s occupier market has lost the enthusiasm that has bolstered its take-up in the past year, a panel heard at MIPIM UK today.
At a panel chaired by EG’s Damian Wild, James Lock, managing director at Blackstone Group International Partners, said his firm benefitted from an “incredible amount of occupier inertia” before and after the Brexit vote. That led to more deals than they could have expected, with the market led by occupiers acting proactively or reactively to a major disruption.
However, he said the market has softened since then and is now driven by occupiers who have lease breaks or expiries coming up. Those tenants are less enthusiastic because of ongoing economic and political uncertainty.
“The choices are pretty limited in terms of supply, which is reassuring, but we have to work to drag these occupiers to the page and ink deals,” he said.
Stephanie McMahon, a researcher at BNP Paribas Real Estate, said that although she was surprised by the number of large deals in London, which include Deutsche Bank committing to 21 Moorfields, EC2, the picture is more complicated.
“There have been some really big deals without a doubt. But London, similar to other major cities around the world, is seeing a shrinking of office space over time. In each of those big deals, more than likely those occupiers are taking slightly less space than they were originally.
“It’s masking an evolution that we’re seeing in the London office market.”
The longer-term prospects are more positive, the panel argued, with Jonathan Evans, office leasing director at Almacantar, calling the London market a well-tuned ship in choppy waters.
“You’ve got a good ship; you’ve got to refit the sails. It’s getting choppy, but it doesn’t mean it stops. It’s tougher, it’s windy, it’s a bit miserable and a bit wet, but we will get through it.”
Evans said that even the worst crises, like the dotcom crash, only lasted 12 to 18 months before bouncing back. “That’s not a long, long time in the history of what we’re going to go through,” he said.
Secondary stock
With London’s office market propped up by major trophy asset deals, the panel at MIPIM UK asked what potential there is for secondary stock.
Michael Wiseman, head of office leasing at British Land, said: “Having high quality office space in fantastic locations around campuses right across London – we are seeing tremendous demand for that.
“That is why from our business perspective we are offering the best quality product in the best location.”
The discussion came as James Lock, managing director at Blackstone Group International Partners, said that two-thirds of available office stock is secondary space while the biggest deals of the year have all been in grade-A offices.
Wiseman argued that this does not necessarily mean exclusively developing “big shiny new offices”, but rather delivering the best option for different parts of the market. He pointed to Canada Water, where British Land is working to deliver more than a 1m sq ft of office space.
“It’s delivering a different product than you would see in the city core, but it is something that works for the market.”
Along with that, Ross Blair, senior managing director at Hines, argued that the line between prime and non-prime continues to be blurred, which means there are options for what used to be secondary stock. Offices in places like Shoreditch can now command rents at or above the level of those in historically core locations.
He said: “As the occupier type in London has changed so dramatically and tenants have become so fleet of foot with tech and media firms paying big rents, buildings we would not have considered refurbishable previously very much are refurbishable because we can create certain character in that space.”
With tenants demanding better accessibility, the panel argued that places like King’s Cross and London Bridge have become more attractive to office workers than parts of Mayfair, which is now driving up rents in those areas.
The London market in brief with James Lock, managing director at Blackstone Group International Partners
On investment: We are starting to see a slight bifurcation in both depth of demand and pricing for long-lease stable assets versus those assets that have near-term vacancy or are exposed to existing vacancy.
Demand is primarily for that trophy, long-lease product, where the Asian buyers have been extremely active.
On the occupier market: We benefitted personally from this occupier inertia prior and post the referendum. What happened was that those occupiers who needed to move engaged very quickly and hence there was a strong bounce in the take-up statistics.
We have now placed the majority of those tenants who need to move and we are dealing with a different audience of tenants. These are tenants who have lease events or breaks coming up shortly. The ability to persuade them to commit to leases today is becoming harder and harder.
The overall supply picture looks very resilient, especially when it comes to grade-A space. If you need to take space today in central London you only have 2m sq ft of grade A which is available.
On the future: Clearly there are some headwinds that have been well-versed – political headwinds, economic headwinds – but over the long term, we as a business are still very much a believer in central London and the UK. For sure, short-term, we will have to see when we get more visibility over some of the issues around politics and its impact on the economy.
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The panel discussion was held in partnership with
