Empty space equal to 72 Shards could hit London office market

Lease break and expiries in London’s office market are set to rise over the next five years with up to 36.4m sq ft of space at risk of vacation, equivalent to the amount of office space in 72 Shard of Glass, SE1 and representing nearly 17% of overall office stock in the capital, according to Radius Data Exchange. Here’s a challenge – think of a swear word beginning with O. Alright, there’s maybe a couple of slightly edgy ones in there but nothing that will get you summarily ejected from the Long Room at Lord’s. There is one, however, that would make landlords and property agents as uncomfortable as Theresa May engaging with the general public: obsolescence. The battle to avoid the “o” word is fought (and measured) differently across property sectors but with technological advances and occupier demands moving at an ever-quickening pace, the task for property developers and owners to stay ahead of the curve is getting tougher all the time. The London office market stands at the heart of UK commercial real estate – and is a perfect example of how shifting sands have intensified the battle against space becoming obsolete, and why landlords have to be more responsive than ever to changing market dynamics. Looking at lease breaks or expiries over the next five years (2019-2023 inclusive), Radius Data Exchange calculates that 36.4m sq ft across the capital is as at risk of vacation, equivalent to the amount of office space in 72 Shard of Glass, SE1 and representing nearly 17% of overall office stock in the capital. That figure also includes more than 300 individual buildings that are at risk of having their entire footprint emptied. If you ran an identical search in May 2010 you would see that 26.7m sq ft was at risk across the subsequent five-year period (2011-2015 inclusive), which represented just under 12% of stock. This is primarily due to lease lengths shortening and more regular lease breaks being factored into new deals over the past 10 years. The impact is palpable on the composition of London office occupancy – there is far less security of long-term income that there once was, and therefore more of a requirement for landlords to curate space which can appeal to a broader range of tenants. Looking back at that 2011-2015 period, more than 75% of that 26.7m sq ft at risk of vacation actually ended up being vacated across the five years. If history repeats itself from 2019 onwards, we will be looking at more than 28m sq ft of London office space being relinquished, leaving landlords to scramble around for new occupiers to fill the void. That, of course, will be added to any space vacated by tenants requiring at the very least a nominal presence within the EU trading bloc, should the UK not manage to secure adequate access for London’s businesses by the time the separation deal is confirmed in March 2019. There has already been a loud and clear message from tenants recently on the appeal of London’s second-hand offer, with availability of those spaces jumping from 6.4m sq ft in 2015 to more than 12m sq ft at the end of March this year, in addition to second-hand units accounting for just 48% of all take-up in 2017 – no annual period going back to 2007 has seen a lower proportion. The message is clear – landlords need to get active. Sitting on secondary space could lead to longer void rates and lost income. Encouragingly, that message looks to have already filtered through. Already this year we have seen starts totalling just over 1.5m sq ft in Q1 – more than any individual quarter from 2017, and there is currently 24m sq ft of new or refurbished office space at permission across central London – so the appetite and opportunity is there for office landlords to grasp the nettle in 2018, and to make sure that obsolescence is not a word that can be associated with the capital’s business space offering. To send feedback, e-mail graham.shone@egi.co.uk or tweet @GShoneEG or @estatesgazette Picture credit: Jens-Christof Niemeyer / imageBROKER/REX/Shutterstock