LOMA Q4 2020: Fresh hopes after a tough year

When record-breaking performances occur in commercial real estate, the response would once have been champagne corks popping in company headquarters (remember those?) to toast success. But the records broken during 2020 give little cause for celebration. London’s office market broke the record not once but twice during the year for the lowest amount of space let during a quarter. Radius Data Exchange figures reveal that just 887,000 sq ft was transacted across the final three months of the year – a 7.5% drop on the previous quarter which had already been an all-time low. This left take-up for 2020 at just 4.9m sq ft – a 60% year-on-year decrease and a similar drop on the long-term annual average. The figure is also 41% lower than the previous record low for calendar-year take-up of 8.3m sq ft in 2012. But don’t put the bubbly away just yet – there was happier news on the investment front to end the year, with volumes a lot healthier than they had been for much of 2020. Radius figures for Q4 show completed transactions totalling £3.5bn, which almost matches the combined total of the preceding nine months. This end-of-year fillip, however, only marginally softened the drop-off in year-on-year investment figures. The year finished with £7.1bn in total transactions – down by a third on 2019’s total and half of the five-year average for overall spend. Pent-up demand None of London’s major six submarkets were able to raise themselves out of the quagmire. Across the board, all metrics showed leasing figures substantially down on the same period last year as well as against longer-term quarterly averages. In the Docklands, only one deal completed during the fourth quarter – and, at just under 4,000 sq ft, it marked another unwanted record for the lowest quarterly take-up in any London submarket. Industry figures are hopeful that 2021 will see the city’s fortunes turn. “Market activity will inevitably be quiet in Q1 2021,” says Philip Pearce, head of central London leasing at Savills. “But many tenants anticipate that from spring they’ll have a better understanding of their return-to-the-office strategies, and plan to use Q2 to view space and complete leasing transactions.” At investor Trilogy Real Estate, chief executive Robert Wolstenholme says: “We believe there is a lot of pent-up demand for the right kind of space that will be unleashed when normality resumes. People are looking at the quantity and the quality of the space they occupy and making new calculations, but we believe that people will still want offices in town.” The largest deal to complete in Q4 was City University, taking 73,700 sq ft at 33 Finsbury Square, EC3. It was 2020’s largest letting in the health and education sector. The letting secured the health and education sector a third place ranking in take-up by business type, behind finance and technology, media and telecoms (TMT). For the year as a whole, financial services occupiers fell to third place for sector take-up, with TMT back on top with more than a fifth of new lettings. Tech firms have been the main driver of leasing activity in the capital for four of the last five years.   Large deals struck earlier in the year for law firms Covington & Burling, Linklaters, and Baker McKenzie were a significant factor in helping professional services take second place for occupier activity – bumping the financial sector out of the top two for only the second time since EG began tracking this data in 2006. Massive disruption The major story within the occupier sector, however, is that of serviced office operators, which fell from a 16% share of annual take-up in 2019 to just 5% this time around. The last six months have yielded only one serviced office deal in central London according to Radius data – The Office Group’s 70,400 sq ft letting at 210 Euston Road, NW1, in August. Emma Swinnerton, head of flexible workspace at Cushman & Wakefield, notes that usage of flexible workspaces dropped to 10-15% of pre-lockdown levels, with customers either terminating or re-negotiating existing commitments. Dan Silverman, co-founder of Spacemade, which helps landlords set up their own flexible workspace offering, describes the “huge reduction” in new lettings by serviced office operators as “a leading indicator of the massive disruption occurring in the market”. He adds: “As we emerge from the pandemic, the provision of flexible space is likely to increase substantially as businesses demand increases flexibility. However, it will increasingly be landlords providing it directly, enabling a much closer relationship with their tenants.” Swinnerton also sees flexible space being pivotal to companies’ ability to offer the right workspace after the pandemic. “Frustrations with continued homeworking will drive renewed demand for quality flexible workspace, whilst allowing businesses to maintain an element of flexibility in order to react to an uncertain trading environment,” she says. Two-tier market Serviced office operators have been the largest net expander by business type across London in recent years, while other types of occupier have focused more on consolidation, according to an analysis of Radius figures carried out last year. As expansion slows, it removes a critical factor in helping to insulate London’s office market from oversupply. The drop-off in serviced office take-up was a key dynamic underpinning a sharp uptick of available space flowing onto the market in the final quarter, bringing with it a 0.7 percentage point outward movement of the London availability rate to 7.8% – its highest since early 2013. The peak availability rate in London was in Q3 2009, when it topped 10% due to a high volume of unlet completions adding to available second-hand space. Although the amount of second-hand space is likely to continue to creep upwards, there is no sign yet that unlet completions will flood the market in the same way they did a decade ago, putting pressure on rents. London rents are falling however, with Radius figures indicating a 1% drop in average rents last year across all grades of space. But, due to the relative health of the prelet market, that drop is less pronounced than a decade ago, when rents slumped by an eye-watering 27.5% between 2008 and 2010. A divergence between different stock types has been felt across the London market, according to Bradley Baker, director at CO-RE. “There is undoubtedly a disconnect at the moment between the prelet market and stock that is immediately available, with the latter bearing the brunt from the pandemic,” he says. Savills’ Pearce agrees, adding: “At the moment we are in a two-tier market, and are likely to remain so. Grade-A prime space will stay in high demand across the whole of central London, but there will be a widening gulf with secondary, as occupiers refuse to settle for anything other than the best space.” Responses from EG’s consensus panel of agents suggests a 1.1% drop in grade-A rental tone over the fourth quarter, while incentives have again moved outwards – this time by 2.8% against Q3. Once again, all 11 markets included in the survey showed a quarter-on-quarter decrease in rental tone – and only the Southern Fringe submarket fell by less than 1% against Q3. This suggests that, as the economy splutters and requirements shrink, landlords are having to sweeten their offer to potential occupiers in order to get leasing deals over the line. In this context, the strong end to the year for investment is particularly notable, as a total of £3.5bn in completed purchases came through in the final three months of 2020, representing more than a four-fold increase against the previous quarter. This total was bolstered by the three largest deals completed in the entirety of 2020, as Singapore-based Sun Venture bought 1 and 2 New Ludgate, EC4, for £552m; 1 London Wall Place, EC2, changed hands for a reported £480m; and a 50% stake in the Nova Estate, SW1, was acquired by another Singaporean firm, Suntec. Individual assets can, of course, significantly outperform the market average – as has been demonstrated recently by the news that a record rent has been set in the City of London. This dynamic could manifest itself in a much more apparent “flight to quality” in the investment market, echoing developments in the occupier market, says Jonathan Crawley, UK managing director of MiddleCap. “There is a healthy number of active investors in London who are taking a long-term view and who remain undeterred by current market conditions,” he says. “Investors know that occupier demand is still there for the right product and right location and this has been driving the market.” Julian Sandbach, head of central London office markets at JLL, adds: “As ever, investors will be drawn to the best located and highest quality real estate in the near term. “We expect that increased levels of capital will flow into London real estate in 2021, in part due to the stability given following the Brexit trade agreement, partly due to vaccine roll-out and greater clarity on office strategies, but also due to a sense that London’s fundamentals remain strong.” As with the occupier markets, however, any anticipated rebound in 2021 on the investment front may take time to come to fruition. “The impressive Q4 outturn is indicative of the enduring investor demand for London’s real assets and yields,” says Ned Williams, director at Evans Randall Investors. “But those investment decisions were made before new Covid-19 variants and further restrictions came to the fore, which are causing a slower start to 2021 than many would have hoped. “In the longer-term, employers are re-evaluating their office requirements and strategy – and because it is too early to conclude what the impact of that re-evaluation will be, it forces investors to be disciplined.” Is the future flexible? The year ahead is likely to see further changes to the ways in which companies ask their workforces to perform and the real estate needs that come as a result. There has unquestionably been a nationwide re-imagining of the shape of white-collar working patterns, how much communal office space will be needed in the future and where exactly in the country it will be required. But, in contrast to much of the industry debate last year on how office working would change, the new year has brought with it some fresh impetus for UK markets. January’s World Economic Forum provided the platform for high-profile financial institutions to question the sustainability of permanently working remotely, and a recent study from footfall monitoring company Metrikus has revealed that more Brits are going into the office during the current lockdown than in the first, despite the extra difficulty of commuting in colder weather. This suggests that the future of working will be more flexible. Some work will still need to be done in a centralised office, where particular activities can be carried out more easily, collaboration can occur more organically, and training can be administered with greater focus and empathy. Within this framework, London remains well-placed to provide the infrastructure for all types of businesses to develop and grow – but there may be short- to medium-term pain as a bridgehead is built to whatever version of normalcy is crafted after the pandemic. AGENCY LEAGUE TABLES Q4 2020 City Core Colliers International leapt from sixth place in last quarter’s league table to take top spot in the City Core. A single deal for City University London at 33 Finsbury Square, EC2, was enough to propel the agent to the top of the pile with a 27.5% market share. Second-placed Knight Frank also enjoyed a significant quarter-on-quarter improvement, rising from seventh place thanks largely to its involvement in the second-largest deal in the submarket, a 29,000 sq ft space at 25 Copthall Avenue, EC2. Completing the set of upwardly-mobile agents in the City Core is HK London, which jumped into fifth position from 10th in Q3, completing more transactions than any other agency in the process. The largest of its six deals came at 40 Lime Street, EC3, in a 7,000 sq ft letting to Zeus Brokers. City Fringe Cushman & Wakefield retained the City Fringe title it won last quarter in another closely fought submarket contest. It acted on 56,500 sq ft to secure a 44.1% market share – just edging out Colliers International, the only agency to act on more than two deals in the City Fringe this time around. Underpinning the victory for Cushman & Wakefield was acting on a 38,800 sq ft letting at Devon House, E1, to New College of the Humanities. Both league leaders, meanwhile, advised on the 17,700 sq ft deal for Four Communications at 2-4 Whitechapel Road, E1. Docklands The sole deal in the Docklands during the quarter saw Fairmont take space at South Quay Plaza, E14, overseen by BH2, Knight Frank and JLL. Midtown Mirroring the City Core submarket, a single Midtown transaction ensured Colliers International climbed from outside the top five in last quarter’s standings to take the crown. Its unsurpassed 29.4% market share came by acting on a 35,700 sq ft letting at 2-6 Dryden Street, WC2. BNP Paribas Real Estate claimed second place with an 18.3% market share – anchored by a pair of deals at 1 Tudor Street, EC4, to Enyo Law and the International Finance Corporation respectively. Farebrother just edged into third place – but was the most active agent by deals volume. The largest of its five transactions came in the shape of a 7,800 sq ft letting to Morgan McKinley Group at 15 Fetter Lane, EC4. Southern Fringe A relatively subdued quarter overall in the Southern Fringe – but there was enough activity to help Union Street Partners reclaim its title, having been narrowly pipped to the post last quarter. The largest of its four disposals came at 58-72 Upper Ground, SE1, where Proposition Studios took 23,600 sq ft. (Note that EG calculates market share using overall take-up as the denominator – but in fact USP was involved on all four deals to actually involve a disposing agent.) West End Bluebook enjoyed a commendable quarter-on-quarter improvement in market share to win the West End submarket with 31.4% of overall activity this time around, having been placed in sixth position in Q3. Critical to its success was acting on the largest deal in the West End this quarter – a 58,000 sq ft letting at 40 Portman Square, W1, as well as a 9,600 sq ft deal at 64 North Row, also W1. CBRE took second place having acted on just under 54,000 sq ft of disposals this quarter – chief among them being a 30,200 sq ft deal at 20 Air Street, W1, and a 12,700 sq ft letting to Mubadala Investment at 25 Berkeley Square, W1, on which it jointly advised with third-placed Edward Charles & Partners. Overall Q4 leasing (disposals) Two submarket victories and a close second place in another helped Colliers International to climb from ninth place last quarter to a victory in the overall disposal league table, claiming an 18.5% market share in one of the most competitive quarterly league tables on record. Cushman & Wakefield jumped a position into second place with a 17.9% market share, while Knight Frank climbed from seventh in last quarter’s reckoning to complete the top three – and was also the most active agent this quarter by deals volume. Anchored by victory in the West End, Bluebook leapt from 19th in last quarter’s league table to secure a top-five berth on this occasion. That 14-place improvement in position was matched by Farebrother, which came into the top 10 from 24th in last quarter’s standings. Investment Acting on just under £2bn in investment deals throughout the quarter, CBRE jumped from third place to top the pile, securing a 33.8% market share in the process. JLL also enjoyed a rank boost from Q3, moving from sixth place into second after advising on £1.16bn during Q4. Both acted on the deal which saw Landsec dispose of 1 and 2 New Ludgate, EC4, for a reported £552m; while CBRE was also involved in selling Atlantic House, EC1, for around £265m in December. Having not featured in the top 10 last quarter, BH2 rounds out the top three. In tandem with victor CBRE, it advised Brookfield on its £480m disposal of 1 London Wall Place, EC2.   AGENCY LEAGUE TABLES FULL YEAR 2020 Overall leasing (disposals) Cushman & Wakefield tops the full year disposals league table for 2020, rising from third place to take the title with a 25.2% market share achieved through acting on more than 1.35m sq ft of lettings. It acted on each of the four largest office transactions in 2020 – headlined by Linklaters’ 307,000 sq ft deal at 20 Ropemaker Street, EC2, in February. Last year’s victor, CBRE, was the only other firm to top the 1m sq ft mark in disposals during the year, achieved by completing 88 individual transactions – more than any other agency. Largest among those deals was the 152,700 sq ft letting to Baker McKenzie at 280 Bishopsgate, EC2, on which it acted alongside Cushman & Wakefield and fifth-placed BH2. Thanks to its late-year surge in the West End, Bluebook comes into the top 10 from 20th position in last year’s league table, securing a 3.3% market share with 175,500 sq ft in disposals throughout 2020. No agent managed more than 100 disposal deals this year – in stark contrast to 2019, when seven of the top 10 in our league table hit triple figures.   Overall leasing (acquisitions) A case of role-reversal from the annual disposals standings here, as CBRE ousted Cushman & Wakefield as victor of the tenant-side league table for 2020, acting on more than 676,000 sq ft in acquisitions. It acted on behalf of Google in acquiring 135,000 sq ft at Euston Tower, NW1, as well as Arcadis on its 40,800 sq ft deal at 80 Fenchurch Street, EC3. Second-placed JLL completed more tenant-side deals than any other firm during 2020, including for Netflix at The Copyright Building, W1, and IPG Mediabrands at 16 Old Bailey, EC4. Daniel Watney stormed into the top 10 from 32nd place in last year’s league table, with the bulk of its 70,000 sq ft in overall acquisitions coming in one deal at 69-89 Mile End Road, E1, where it advised Queen Mary University of London. Monmouth Dean was also a significant mover during 2020, completing 17 acquisitions, of which the headline-maker was a 65,000 sq ft deal for Roxor Gaming at 25-29 Golden Square, W1. Investment For the third consecutive year, CBRE comes out on top of the pile for London office investment activity, advising on more than £3bn to secure a 23.9% share of the market – just higher than the 22.4% market share it won with last time out. JLL climbed from third place last year into second, achieving a 13.4% market share after advising on £1.7bn in transactions. Knight Frank completes the top three with an 11.5% market share which saw the firm come into third place from fourth position in 2019. Crucial to CBRE’s victory was 1 and 2 New Ludgate, EC4, which sold to Sun Venture for £552m in December – the same deal was also pivotal in boosting acquiring agent JLL up the standings. Allsop was the only newcomer to the top 10 this year as against 2019 – securing a 4.2% market share through acting on just under £540m in investment transactions. The largest was the £250m sale-and-leaseback of BP’s headquarters at 1 St James’s Square, SW1, on which JLL also advised. To send feedback, e-mail graham.shone@egi.co.uk or tweet @GShoneEG or @estatesgazette