Deals have caused upset in the London office agent league tables before, but few have totally derailed it.
However, according to EG’s London Offices Market Analysis, two lettings in the second quarter saw the rule book thrown out of the window with the emergence of an entirely new submarket.
Long vaunted and eagerly awaited, the transformation of Stratford, E16, into a key business district looked to be one step closer with the announcements of the 270,000 sq ft and 425,000 sq ft prelets at the International Quarter to Transport for London and the Financial Conduct Authority.
The lettings saw JLL sneak past league table rival CBRE to take the top spot in EGi’s London office market analysis, and helped BNP Paribas Real Estate rocket from eighth to third place.
According to Dan Bayley, head of central London offices at BNP PRE, it is Stratford’s moment in the sun. “The two deals at Stratford are reinforcing it as a complementary market. If everyone considers Canary Wharf to be part of the central market, then this is a start for Stratford,” he says.
But can Stratford, long talked about as spillover space for the core, gain the momentum it needs to become a true London market?
Take away those two headline grabbing deals and a very different league table emerges. CBRE is back in the lead, with almost twice the activity of second-placed Savills, pushing JLL back down to third. BNP PRE would plummet to 21st place.
It is hard to ignore 695,000 sq ft of lettings but while Stratford is starting to come into its own – luring occupiers with discounted rents, superb connectivity and proximity to green space and shopping – it is still a long way from being an established office market.
Agents remain torn over whether this is the start of something big. Investment outside of the public sector is needed to prove it. Stephen Down, head of central London at Savills, asks: “Will a sovereign wealth fund from China go and invest there today? It is far too soon. But if you get international capital going there, that will be a further tick in the box.”
What the lettings emphasise is an increasingly tight London market. Excluding Stratford, take-up exceeded 3.5m sq ft – 25% up on Q1 2015 and 23% above the quarterly five-year London average. The 446 deals recorded were almost double that of the first quarter and investment is on the rise, despite concerns over pricing in core areas, especially in the West End.
Paul Smith, director of London offices at Colliers International, says: “In 35 years I have never known it as tight as it is, and it is only going to get tighter.”
This has led to a considerable reduction in average deal size – from 12,200 sq ft to just over 8,000 sq ft – as companies take less of the increasingly expensive space.
Had the FCA and TfL deals not landed at Stratford, it would have been Canary Wharf and the wider Docklands market that was singing. Docklands posted one of its strongest quarters on record – take-up rose by almost five times that of the previous quarter, to 618,500 sq ft.
Perhaps the best indicator of this is that for the first time in its 24-year history, One Canada Square, E14, is fully let. Other notable deals this quarter included Clifford Chance’s sub-let to Deutsche Bank at 10 Upper Bank Street, E14.
Docklands was the only submarket to see an increase in average deal size, from 15,000 sq ft to 28,000 sq ft. Bilfinger GVA creeps into second place in the Docklands league table, despite only acting on one deal, but it was CBRE that managed to capitalise on the increase in deal size. It upped its market share from 49% in Q1 to 77% in Q2, and disposed of 486,000 sq ft – eight times what it acted on previously.
BNP PRE’s Bayley says: “Docklands is seeing a bit more diversity of occupier base. It is now being seen as a credible, value-for-money option by a lot of occupiers.”
The City fringe market has similarly benefited from supply squeeze, with rents creeping over the £50 per sq ft mark average. Take-up overall in the fringe is up by 33% to 463,000 sq ft, but deal sizes almost halved to 6,250 sq ft, showing how hard it is around the City to find large floorplates.
With so much activity in the fringe markets, it would be easy to forget about the core, but both the City and West End are still booming.
While the total take-up in the City fell by 2%, it was still well above 1.15m sq ft and well ahead of the five-year quarterly average of 1m sq ft. Deal numbers were up by 43%.
“There is a good indication that the heart of the City is beating strongly,” says Savills’ Down, “the financial centre is beginning to wake up and businesses are looking for new premises, and that is the last sector in this phase of the cycle.”
JLL dominated the City market, disposing of just shy of 390,000 sq ft and acting on the most deals. Last quarter’s second place, CBRE, slid down the league to fourth.
In the supply constrained West End, where lettings at 8 St James’ Square, SW1, have grabbed the headlines with rents of more than £185 per sq ft, overall take-up figures were up 46% to 771,500 sq ft. Availability stands at just 4.4% – the joint lowest in London, alongside the South Bank.
With 37% of the market, CBRE was top in the area. Its 318,500 sq ft of disposals meant it acted on almost three times more space than second-placed Colliers International.
Colliers’ Smith says supply had reached such a premium in the West End that there was latent demand even without business growth. He says this is because of a number of expiries coming up for long-leased stock that is far from fit for purpose.
Smith says: “When take-up falls, it is because the space is not there. Take-up is going to go down over the next couple of years – not because people do not want space, but because it is not there.”
It is a sentiment echoed by many agents, who were universally positive about take-up from occupiers, despite supply constraints.
Adrian Crooks, head of JLL’s West End office agency, says: “What is positive is actually how healthy the market is across all sectors and geographies.
“The odd deal in St James’ Square rightly grabbed the headlines in terms of rent, but the demand we track is coming from as broad a spectrum as I have ever seen.”
As demand continues to ramp up in central London, there is going to be increasing pressure on the fringe and emerging markets, and it may well help Stratford cement its place in the London market.
Investment
Investment rose to £4.6bn for the quarter, up by 21% on Q1 2015, and by 15% on Q2 2014.
Despite pricing becoming tighter in the core, agents remained confident about future prospects for investment, particularly for those assets with the potential for rental growth.
Knight Frank’s head of central London Stephen Clifton says the market is “changing on a sixpence, from a tenants’ market to the opposite. Investors are aware of this change in dynamic, and the clamour for schemes ready to develop now, or be refurbished swiftly, are high”.
Paul Grindal, director at JLL, agrees, saying there is still a huge amount of interest from investors on a broad spectrum of pricing and risk, with growing activity in sales from those who had bought in the 2009-11 period. “The limiting factors for vendors is what to do with the cash, to gain entry back into the market,” he says.
Agents are expecting this investment to continue, and while figures were dominated by the City and West End markets, there are emerging opportunities in both in the core and peripheral areas.
Savills’ Down says: “On the capital markets side, there have been two years now of £20bn worth of turnover, and the numbers suggest we are heading in the same direction this year.”
