LOMA Q1 2020: Pandemic adds to problems for a subdued market

The coronavirus pandemic seems likely to be the most significant challenge to hit London’s office market for a long time, with the unique circumstances contributing to the worst letting performance in eight years. New office take-up in the first quarter of 2020 totalled 1.9m sq ft, according to Radius Data Exchange – the lowest amount of space transacted in any quarter since Q1 2012. The take-up figure was down by a quarter against the same period last year and almost 30% lower than the five-year average for the opening quarter of the year. And while Covid-19 has clearly added a new dimension to businesses’ occupational needs as they start to look at both their costs and new working patterns, the decline in take-up may also have been influenced by a number of other factors. The intricacies of Brexit after all are still looming large over the landscape. The quarter would have looked far worse, too, were it not for Linklaters, which gave a lift to the numbers when it agreed to take 307,000 sq ft across 14 floors at 20 Ropemaker, EC2. That one deal was more than twice as large as any other transaction to complete over the start of the year, and accounted for 16% of the entire quarterly take-up. Only three times in the past seven years has an individual deal commanded a greater share of quarterly activity. Linklaters’ letting meant that the City Core submarket saw the same amount of space taken as at this point last year. No other submarket was that fortunate – all others saw significant drop-offs in letting activity. Tech tenants top take-up In a subdued market, agents were reliant on the trusty technology, media and telecoms sector to drive deals. Beyond the mammoth letting for Linklaters, four out of the next five largest deals by square footage were for TMT firms, including two deals for Google at Euston Tower, NW1, and King’s Cross Central, N1C. Those helped the TMT sector to emerge as the dominant business type for new space taken this quarter, commanding roughly 28% of activity. Next in line was the professional sector with a 22.7% share of take-up. It was the first time the sector had been so high in the ranking since the first quarter of 2017, when another big legal name, Freshfields, signed for a significant amount of space to anchor a second-placed finish, again behind TMT.   With Linklaters’ move in the spotlight, the legal sector is expected to remain a busy source of deals for the rest of this year and beyond. Law firms have been increasingly voracious in their desire for best-in-class provision – and, prior to the spread of Covid-19, were eyeing up a large chunk of London office space. Earlier in the year, JLL estimated that a plethora of high-profile legal firms had around 2.5m sq ft of requirements either active or under consideration between them. Many of those firms were launching searches for space several years out from lease breaks or endings. Scrutiny of those requirements over the next few months will centre on whether these businesses are changing or reducing their requirements in any meaningful way. And for the deals that do get struck in the short-term, industry players will be keen to see whether there is any noticeable shift in prime rental tone, given the inevitable concerns of companies in all sectors around operational costs. For now, it appears that prime rents have been thrown into a holding pattern. Radius’s contributory panel of agents indicates that after five consecutive quarters of growth, prime rental tone across central London was flat at the end of March in comparison to the final quarter of 2019. Most contributors anticipate a downward revision to come in the second quarter.   Fear and fundamentals If rents do shift downwards during late spring and early summer, further moves may depend on how occupiers see the shape and speed of recovery after the pandemic passes. Is a one-quarter drop in rental tone the first stage in an ongoing retrenchment of rental values in an elongated downturn? Or does it serve as an opportune time to strike deals at a discount prior to a shorter, sharper recovery? Allied to that decision-making will be the supply of space across the capital, and the extent to which any shifts have either suppressive or inflationary effects on rental tone. Recently, the in-situ supply rate has almost been overshadowed by statistics on how much of the development pipeline is prelet – such has been the extent to which development space has influenced occupational activity. This quarter, the availability rate drifted outwards slightly by 30 basis points to 6.7%. But the proportion of under-construction space currently prelet has actually ticked upwards over the three months, to 40.5%. On top of the perceptions of domestic economic recovery, the movement of these two figures over the short-to-medium term will probably have acute influence over the minutiae of lease agreements – not to mention the confidence level of London’s developers in forging ahead with projects once construction sites are able to reopen. In the investment market, some buyers will undoubtedly maintain a pragmatic “wait and see” attitude as events continue to unfold. Others will view things more opportunistically and act earlier during what they hope will be a temporary repricing of asset values, which then appreciate alongside a swifter economic recovery. The year has started reasonably well for investment volumes, with Radius Data Exchange figures indicating that £2.3bn was spent on London office assets during the first three months of the year – representing an increase of 67% on the opening quarter of 2019. But at least £1.1bn in potential investment was either abandoned or pulled from the market by vendors in late March. The strength of investor demand evident over the past couple of years is characterised by an appreciation of London’s strong fundamentals. But political dissonance has led to demands for discounts, suppressing overall spend in a market with limited distress and therefore resolute vendors keen and able to hold out for optimum sale prices. The pent-up demand will not disappear overnight – but it is likely to reduce in the short term, and so the next few months will give a clearer picture of the scale to which vendors’ resolve on pricing in particular is impacted by occupational considerations, as well as the strong likelihood of decreased competition for assets.   After the crisis Now, all industry players are waiting to see the effects of the Covid-19 pandemic – in the coming months, how will the enforced lockdown reshape the ways in which workers want to work, and employers think of their real estate footprint? The near-term bad news is stark. A global recession is seen in many corners as inevitable. The International Monetary Fund is forecasting an economic contraction of 3% worldwide – the worst since the Great Depression of the 1920s – while domestically, the Office for Budget Responsibility has modelled one scenario which forecasts an eye-watering 35% fall in GDP next quarter, based on the current lockdown lasting for three months. Business-as-usual has been put on pause through government interventions, but there are hopes that those interventions will mean that once lockdown rules are lifted, businesses may be better able to contribute towards economic recovery – in whatever shape it takes. For major office hubs such as London, perhaps the most significant questions now and during the recovery will be around the evolving nature of office requirements following a period in which so many businesses have found that working from home can, in fact, work. Perceived by some as a luxury or novelty before this crisis, home-working has now become critical to business continuity. Many business leaders are probably now aware that it can be effective and productive across departments. Technology infrastructure is enabling efficacy and productivity for a greater cohort of workers in a way once not thought possible. Employees may have their own reasons for encouraging companies to let them log on from the living room. Most of London’s workforce commutes to and from the built-up central business areas on crowded trains or buses – what proportion of that workforce will be happy to return to commuting to the office if they now feel capable of carrying out tasks remotely? And what will that mean for the requirements of companies nearing lease events? Landlords will add this to a list of worries, particularly those running serviced offices. Flexible operators taking space at scale has helped underpin strong core occupancy levels in London since the EU referendum was called in early 2016. That helped to maintain a robust equilibrium of space supply as other business sectors consolidated space. The way in which those operators navigate the economic downturn will be of critical importance to a great many landlords and investors across the capital. So far, steps of varying magnitude have been taken by global operators in order to steel themselves against the worst impacts of the impending downturn: Knotel has either dismissed or furloughed half of its staff; IWG has moved to raise a chunk of cash through sale-and-leaseback of 10 UK properties; and WeWork has reportedly asked landlords for rental discounts as it attempts to regroup after SoftBank’s withdrawal from a proposed $3bn stock purchase in early April. The first-quarter figures offer only a suggestion of how the current crisis will play out. The coming weeks and months will spell out more clearly how tough the road ahead will get.   London’s most active agents revealed EG takes a submarket view of leasing activity using the latest Radius Data Exchange deals for Q1 2020. Cushman & Wakefield’s role as disposing agent on the 307,000 sq ft prelet to Linklaters at 20 Ropemaker, EC2, anchored its jump from third place last quarter to top of the table this time around. BH2 climbed from fourth last quarter to second on this occasion, thanks largely to advising on the 93,100 sq ft letting to IPG Mediabrands at 16 Old Bailey, EC4; as well as jointly disposing of 22,600 sq ft to Stephenson Harwood at One Finsbury Circus, EC2, alongside fourth-placed CBRE. Gryphon Property Partners climbed from 17th place in the final quarter of 2019 to secure fifth place this time – anchored by its involvement in the third-largest transaction this quarter in the City Core, around 35,500 sq ft at 25 Copthall Avenue, EC2, on which it jointly advised with seventh-placed Squarebrook.   Colliers International retained its title from last quarter in the City Fringe submarket – achieving a 47.4% market share by advising on seven individual deals totalling 97,300 sq ft. Allsop jumped from 11th last time out to take second place in this quarter’s table – thanks in large part to advising on 47,800 sq ft at Department W, E1, alongside victor Colliers International; while Savills and Montagu Evans’ involvement in the 40,800 sq ft deal for MVF at Wenlock Works, N1, also in tandem with Colliers, contributed to their finishing in third and fourth place respectively.   CBRE jumped from fourth place last quarter to top of the pile on this occasion, securing a 92.6% market share through just over 34,000 sq ft of disposals in what was a subdued Docklands market. It acted alongside second-placed Allsop on the bulk of the significant transactions in Canary Wharf across the three-month period – all of which came at the Import Building, E14; with Your Parking Space, Global Banking School and International Water taking 14,600 sq ft, 10,400 sq ft, and 6,500 sq ft respectively. Midtown saw another title retention from Q4 2019, as CBRE clung onto top spot by advising on just under 43,600 sq ft across eight individual deals to secure a 24.1% market share. Second-placed Savills and third-placed Cushman & Wakefield jointly acted on the largest individual deal in Midtown this quarter at King’s Cross Central, N1, where Google took 37,400 sq ft. CBRE’s success in the submarket was anchored by a 17,900 sq ft disposal to Capgemini at 40 Holborn Viaduct, EC1; and a 9,400 sq ft letting for Carter Ruck at 90 Fetter Lane, EC4, on which it advised jointly with BNP Paribas Real Estate.   Union Street Partners continued to dominate the Southern Fringe market – with this quarter’s title representing the fourth consecutive victory for the submarket specialist, which secured a 50.9% market share through advising on more than 54,600 sq ft across 12 individual transactions – nine more than its closest competitor for deals volume. It acted on the 18,465 sq ft letting to Pennine Way at 18 Hatfields, as well as deals for Adam Smith International and Informa Group at 240 Blackfriars, both SE1. Cushman & Wakefield jumped a place from last quarter’s league table to finish second this time – helped largely by disposing of 13,100 sq ft at The Shard, SE1, to Teighmore.   Edward Charles & Partners jumped from fifth place last quarter to take the title this time for its first quarterly victory in the West End – achieved through 12 individual disposals spanning more than 190,000 sq ft to secure a 38.4% market share. Critical to this was in advising, alongside second-placed Cushman & Wakefield, on the 134,800 sq ft letting to Google at Euston Tower, NW1; as well as an 11,600 sq ft disposal to Chanel at Bond Street House, W1, which headlined a spate of smaller lettings that powered ECP to the top of the pile. Tuckerman rose one place into the top five, thanks largely to the fact that only ECP brokered more individual lettings than its nine – the largest of which came at 60 Buckingham Palace Road, SW1, where it advised on a 6,300 sq ft deal to Kelkoo Group alongside fourth-placed JLL.   Having advised on the only two deals this quarter to measure more than 100,000 sq ft, Cushman & Wakefield secures its first Central London quarterly disposal title since Q3 2018 with more than 653,000 sq ft in landlord disposals – enough to tie up a 32.6% share of the leasing market. CBRE comes in second with a 15.1% market share, having acted on more individual transactions than any other agent; while BH2 completed the podium finishers with its strong performance in the City Core submarket just enough to edge West End victor Edward Charles & Partners into fourth place – itself a big improvement on an 11th place showing last time. Union Street Partners joins ECP in being a submarket victor, enjoying a significant overall league table rise in comparison to last quarter – with its 10th place finish secured through advising on more than 61,800 sq ft a notable improvement on 14th position in the Q4 2019 reckoning.   Cushman & Wakefield completes a quarterly league table “double”, climbing from third place last time to top the table for investment advisory with a 22.2% market share, achieved through acting on more than £780m during the three-month period. CBRE maintains the second position it achieved last quarter, running Cushman close by advising on £742m of transactional volume to achieve a 21.1% market share; and Savills rose from seventh place in the previous quarter’s reckoning to complete the podium finishers with a 16.5% market share by way of brokering almost £580m in investment transactions. Cushman & Wakefield and CBRE both acted on the largest individual deal this quarter which saw Premier Place, EC2, change hands for a reported £330m. Savills, meanwhile, acted for Union Investments on its acquisition of the remaining 50% stake in Watermark Place from Oxford Properties, which was advised by CBRE. To send feedback, e-mail graham.shone@egi.co.uk or tweet @GShoneEG or @estatesgazette