LOMA Q4 2019: Confidence returns as clarity emerges

Buyers loosened the purse strings post-election to bolster London office investment figures in the final quarter of last year. Occupational activity remained solid but unspectacular as a decade of upheaval and evolution in the capital’s office market came to an end. During the final three months of the year, office take-up totalled 3.4m sq ft, according to figures from Radius Data Exchange, reflecting a decrease of 11% against the equivalent period in 2018, but ahead of five-year and 10-year quarterly averages to the tune of 7.2% and 11.5% respectively. This end-of-year activity leaves us with annual take-up of 12.3m sq ft let across central London, down by 8% year-on-year and down by 6% on the five-year average for take-up volumes. However, grade-A rental tone continues to move in the right direction as occupiers target best-in-class space across the capital. See also: LOMA full-year submarket league tables 2019 Late December saw a significant influx of investor activity, with a glut of high-profile transactions completing in time to give a quarterly spend of £4.4bn – more than double the amount spent in the third quarter, and up by 27% on the same period a year earlier. Mercifully, a significant proportion of the political uncertainty that threw a cloud over market activity for much of 2019 was removed by the outcome of December’s General Election. Navigating through a maelstrom of possible outcomes relating to Brexit, wages, taxation and corporate governance to attempt the formulation of contingency plans was undoubtedly having a suppressive effect on business confidence during autumn. Recent data from PMI services indices and the results of Deloitte’s Q4 CFO Survey indicate that an immediate spike in confidence and optimism has followed the election result. Further clarity will be sought by businesses throughout the year on trade with the European Union as the government pursues its ambition of ratifying an all-encompassing deal by the end of 2020. Various interim deadlines for discussions on sector-specific details should give further indication to occupiers and investors in London as to what exactly to expect in terms of operational realities in 2021 and beyond – perhaps of most importance is the red letter day for completing “equivalence assessments” on financial services to come in June. Looking longer term, businesses will continue to consolidate their physical footprint as well as seeking a combination of high-quality core space with flexible additions, and sharpen their focus on talent retention, wellbeing and operational efficiency. London currently provides some of the best-in-class space to help businesses achieve these aims, but it will have to keep evolving at the same intense pace to maintain its position as one of the leading global commercial cities over the next decade and beyond. Take-up of 3.4m sq ft across the capital represented a 0.1% quarter-on-quarter increase in letting activity – and a healthy bump on long-term leasing averages for all quarters. However, the final three months of the year has, in recent years, been the period in which letting activity has tended to accelerate, so if we look solely at final-quarter averages for London over the long term, the 3.4m sq ft figure is actually 12% down on the five-year figure and 4% down on the decade-long average. This was underpinned by a patchwork of varying levels of submarket performance, as some areas of London continued to show strength while others fell short of their historically resilient volumes. For the fifth successive quarter, the City Core submarket played host to the largest amount of new space taken in the capital. Anchored by deals for Monzo Bank at 5 Appold Street, EC2, and for Convene at 80 Fenchurch Street, EC3, more than 1.3m sq ft was snapped up by occupiers in an end-of-year rush across the Square Mile, representing a 12.5% increase on last quarter and a 34% uplift on the five-year quarterly average. Robust levels of activity were also seen in the West End, which posted the highest quarterly letting volumes in a year, with take-up of 951,000 sq ft – up by 28% on the five-year quarterly average. This figure was boosted by the largest individual deal in the quarter – a 144,500 sq ft letting to Facebook at 10 Brock Street, NW1 – and means that the West End finished 2019 with take-up of 3.2m sq ft, a 10% increase year-on-year. The Midtown and Southern Fringe submarkets remained subdued over the final quarter, with take-up 35% and 40% below respective five-year averages – meaning both areas ended the year with occupational activity almost halved in comparison to 2018. Within those areas, however, the supply rate has not drifted outwards as one might expect with suppressed take-up volumes. This mirrors the statistical phenomenon we saw across London, where despite occupational activity falling by 8%, the overall supply rate, measured as the percentage of overall stock currently being actively marketed, has tightened by 0.4 percentage points compared with the end of 2018. Two distinct market forces are behind this. Firstly, smaller availabilities are not flowing into the supply pool in the same way as they have previously – most likely as a result of the increased influence being exerted on the wider market by serviced office operators. Consider that during 2016 and 2017 the number of available office spaces measuring at or below 5,000 sq ft had skyrocketed from 557 to 1,220 in just 24 months – contributing significantly to that outward drift in supply rate that can be seen in the chart. At the start of 2019, that volume of smaller units had fallen slightly to 1,181 – and then dropped again throughout the year to 1,012. This latest drop comes despite the fact that the volume of new deals within this size bracket has fallen by 13% during 2019, so in terms of core office space in units below 5,000 sq ft, both transactional and availability volume have dropped in the past 12 months. In previous years these units may have been used as debut physical space for smaller start-ups or as temporary project-based expansions for larger businesses. But that section of London office demand has been encroached upon by the ever-expanding serviced office sector, giving landlords with smaller units something of a dilemma as to what the optimal approach is should they be faced with an upcoming vacation in a unit of this size. In addition, the growing appeal of new-build or under-construction space to occupiers means that when new-build premises complete, the quantum of unlet space coming into the market and impacting supply rates is lower than it might otherwise have been. Final figures for 2019 take-up by grade-of-space reveal that the year saw a decade high in terms of both sheer volume of under-construction space let and the representative proportion of overall activity coming in under-development units. More than two-thirds of the newly finished office space in London last year was let at the point of completion – another decade-high figure; and one which has a distortive effect on how availability rates move relative to occupational activity. Even with shallower take-up, if a greater proportion comes at development space, this can still mean a tightening of overall in-situ supply. These supply dynamics have helped to maintain relatively robust rental performance across the board but it is more likely the latter of the two having a more profound impact on grade-A rental tone specifically, with occupiers’ flight to quality new-build office space underpinning a continuation of the upward trend on top-line rents seen throughout the year. Average figures from our panel of agency contributors indicate that a quarter-on-quarter increase of 1.1% was seen across London in Q4, with every enclave in the survey returning an uplift in average rent in comparison to last quarter. This reflects an annual increase of 4.9% – the largest year-on-year uplift since the second quarter of 2016. Looking at what might happen with these figures in 2020 and beyond, a construction pipeline currently more than 40% prelet tells us the supply dynamic will continue to be a “push factor” for grade-A rents. Ordinarily we would also state that the equilibrium on supply would be dependent on exactly how much of the 18.2m sq ft at permission comes through to a speculative construction start over the next six months or so. However, such is the appetite for new space that it is difficult to envisage rents being inordinately suppressed by high availability – particularly with such a strong focus on talent retention, operational efficiency and workplace connectivity which can be better satisfied through new-build or refurbished stock. There remains the possibility that crashing out of the single market through governmental failure to successfully agree scope of sectoral trade arrangements by the summer and subsequent refusal to extend the year-end deadline results in a drag on both developer confidence and occupier sentiment. Again, however, the likelihood of the new government causing such unnecessary harm to business operations in the capital in such a way is surely negligible – and with the latest Duff & Phelps’s Global Regulatory Outlook survey showing that London has fallen further behind New York as the world’s leading financial centre in the eyes of those working in the sector, retaining appeal to as many different occupier types as possible will be critical to London’s success over the next decade. That survey, ironically, came at the end of a year which saw financial businesses account for the largest sectoral share of annual office take-up in London at 20.4%, only the second calendar year since 2010 in which finance has managed to edge out the tech sector as the dominant occupier type for new space let. The technology, media and telecommunications sector accounted for 19.6% of new square footage taken in 2019, a decrease from its 24.8% share in 2018, while serviced office operators continued their growth trajectory in London despite some unedifying headlines surrounding WeWork in late summer. The sector was responsible for 16% of new space taken over the past 12 months, the highest such proportion on record. Office investment boost With a clear increase in transactional confidence coming post-election, investment in Q4 totalled £4.4bn, representing the busiest quarter for office investment since Q3 2018 – and with several deals tipping into a January completion, this recent acceleration of activity bodes well for the opening quarter of 2020. That end-of-year sales flurry boosted full-year spend in 2019 to £10.5bn, although that is a 36% drop on 2018 volumes and 31% behind the five-year average for London office investment. In truth, it would have taken a record-breaking single quarter of deals in Q4 to get anywhere close to the five-year annual average with caution taking hold of buyers and sellers throughout the year as the country remained in political limbo. Now, with some of that logjam removed, we have a much more positive outlook on how the market will perform in 2020, particularly regarding investment into new-build stock and development opportunities, which anchored the end-of-year investment boom and, as we have seen throughout this analysis, are currently the main drivers of occupational activity. Buyers are following where occupiers lead, and as consolidations into streamlined, well-connected physical presences in top-quality space continue, we can expect more global capital to target those types of assets throughout 2020 and beyond – so long as the fallout from Brexit doesn’t inordinately impact either construction and development costs or the country’s ability to attract and retain top international talent. Leasing league tables Q4 2019 JLL ends a run of four consecutive second-place finishes to claim victory in the City Core market, having acted on more than 538,000 sq ft of landlord space to secure a market share of 39%. It was also the most active in terms of transactional volume during the three-month period, completing 28 individual deals – three more than nearest rival Cushman & Wakefield. Critical to this was acting on 72,000 sq ft to Convene at 80 Fenchurch Street, EC3, as well as advising on a spate of lettings at 22 Bishopsgate, EC2, alongside second-placed CBRE; and at 70 St Mary Axe, EC3, on which it acted jointly with fourth-placed BH2. Cushman & Wakefield and Knight Frank jointly disposed of the largest deal in the City Core this quarter to Monzo Bank at Broadwalk House, EC2, to help cement their positions in the top five. Colliers International returned to the summit in the City Fringe, having had its eight-quarter-long run of successive quarterly victories broken last time out. It claimed a 47% market share through almost 210,000 sq ft of lettings across 27 individual transactions – 18 more than any other agent in the submarket this quarter. The largest of those came in a 63,800 sq ft deal to Checkout.com at Wenlock Works, N1, on which it jointly acted with third-placed Savills and fifth-placed Montagu Evans. Colliers also advised, alongside fourth-placed JLL, on the 20,800 sq ft deal at 207 Old Street, EC1, to Infosys. Cushman & Wakefield maintained the second position it achieved last quarter, helped by a 45,000 sq ft letting to Adecco at Bishops Square, E1, on which sixth-placed BNP Paribas Real Estate also advised. Having triumphed in the City Core submarket for the first time since Q3 2018, JLL repeated the trick in the Docklands, topping the table for the first time in five quarters with almost 122,000 sq ft of lettings and securing a 57% market share. Together with fifth-placed Savills, it acted on a 32,000 sq ft deal for QBE National at 1 Harbour Exchange Square, E14, as well as a 25,000 sq ft letting to Wateraid at 25 Canada Square, E14, alongside third-placed Knight Frank. Second-placed BH2 acted on the two largest transactions in the submarket this quarter: 42,700 sq ft to Fisher Investments at One Canada Square, E14, together with CBRE; and 32,200 sq ft to Revolut at 7 Westferry Circus, E14, alongside joint agents Knight Frank and Savills. CBRE takes the Midtown title for the third consecutive quarter, acting on 146,700 sq ft of disposals and securing a 43% market share in the process. No agent acted on more transactions than second-placed Farebrother, which climbed from sixth place last quarter to claim the runner-up spot this time around with a 26.7% market share. Anchoring the victory for CBRE was the largest deal in the submarket this quarter – a 78,700 sq ft letting to Deloitte at Athene Place, EC4, on which third-placed BH2 also advised. Farebrother’s climb was helped by its involvement in the 42,000 sq ft deal at 110 High Holborn, WC1, to Knotel and a 14,600 sq ft letting to Work.Life Holdings at 20 Red Lion Street, WC1, alongside Allsop. Union Street Partners held on to the top spot in a relatively quiet Southern Fringe market, securing a 55% market share through almost 76,000 sq ft of landlord disposals spanning 14 individual transactions – 11 more than its nearest competitor for deal volume. Key to this victory were disposals of 24,000 sq ft at 240 Blackfriars Road to Square Enix, and 10,500 sq ft to Disguise Systems at Hermes House, both SE1. James Andrew International broke into the top five courtesy of its involvement in disposing of 11,500 sq ft at 49 Southwark Bridge Road to Knotel, alongside second-placed JLL. CBRE climbed back to the top of the West End league table in Q4, having been deposed in Q2 after a run of four successive quarterly victories. A 21% market share was secured through just over 201,000 sq ft of disposals, just ahead of second-placed JLL with 20% and Knight Frank in third with 19%. CBRE’s success was anchored by a handful of deals at the Zig Zag Building, SW1, and Berkeley Square House, W1; while Apollo Global’s 83,000 sq ft letting at 1 Oxford Street, W1, was the largest of JLL’s 21 individual deal involvements – with fourth-placed Cushman & Wakefield and Knight Frank also advising the landlord. Edward Charles & Partners jointly let 39,800 sq ft to Take-Two Interactive at 30 Cleveland Street, W1, alongside JLL to help maintain the fifth-place finish it achieved last quarter. Winning two individual submarket titles and coming second in two more enabled JLL to reclaim the crown it last won in Q2 2019, having fallen to third place last time out. It acted on almost 980,000 sq ft of transactions across 69 individual deals – more than any other agency – to take a 27% market share. Last quarter’s winner, CBRE, has to settle for second place and a 23% market share, having advised on almost 820,000 sq ft across the quarter; while Cushman & Wakefield completes the podium finishers, having acted on 657,000 sq ft of lettings during the three-month period, securing an 18% market share in the process. Thanks largely to its performance in Midtown, Farebrother jumps from 21st place in Q3 to ninth on this occasion, topping 100,000 sq ft of disposals across the quarter, while Allsop completes the top 10, advising on more than 96,500 sq ft of disposals – the vast majority of which came in the City Fringe submarket. JLL climbed from fifth place in last quarter’s reckoning to storm to the summit this time around. It advised on just under £1.7bn during Q4, securing a 23% market share in the process. Last quarter’s top two – CBRE and Cushman & Wakefield – also surpassed the £1bn mark in activity during the quarter, securing 21% and 17% of the market respectively. BH2 was the big climber in comparison to last quarter. It went from 13th place in Q3 to fourth place this time, with more than £700m in investment advisory during the three-month period, claiming 9.7% of the market. Key to JLL’s victory was acting for King Street Capital and Arax Properties on the £298m acquisition of 125 London Wall, EC2, as well as advising the City of London on the £70m long leasehold sale of Colechurch House, SE1, to CIT Group. CBRE wins the annual disposals league table for the first time since 2016, having acted on more than 3.6m sq ft of space throughout the year to secure a market share of 26.7%. JLL finished in second place, albeit with more individual deals than any other agent, and a 23.5% market share achieved through 3.1m sq ft of disposals; while 2017 and 2018 victor Cushman & Wakefield has to settle for third position, with an 18% market share. Eye-catching transactions for CBRE across 2019 included the 360,000 sq ft letting to the European Bank for Reconstruction and Development at Heron Quays West 2, E14, alongside fifth-placed BH2 and JLL; as well as BT’s preletting at One Braham, E1, which it acted on jointly with BH2 and Cushman & Wakefield. For the second year running, the same firms comprise the top nine positions in the league table – with only Edward Charles & Partners providing a meaningful alteration to the top 10. It acted on 70 individual deals to achieve a market share of 2.7% across the year – helped in great measure by its Q4 performance in the West End submarket. Further rises took place outside the top 10, with Tuckerman jumping from 22nd in 2018 to 12th and Anton Page finishing in 15th position this time, up from 21st in 2018. Cushman & Wakefield climbed to the summit of the tenant-side league table after settling for a runner-up spot last time out. It acted on more than 2m sq ft in acquisitions across 2019 to wrestle the title away from CBRE, which finished in second place, having secured 1.1m sq ft for occupiers. Cushman & Wakefield acted on several high-profile transactions in 2019 – notably for BT on its move to One Braham, E1, in July; for WeWork on its deal at 25 Churchill Place, E14; and more recently acquiring 10 Brock Street, NW1, for Facebook. CBRE acquired for Sony at King’s Cross Central, N1C, and for Convene at 22 Bishopsgate, EC2. Familiarity is something of a theme in the annual league tables, with the same names comprising the top 10 as in 2018, albeit with small movements between them. Kontor, for example, jumped from ninth place in 2018 to seventh this time out, having brokered 393,500 sq ft for occupiers in 2019. Outside of the top 10, Newton Perkins climbed significantly from 21st in the 2018 league table to 11th in 2019’s reckoning, with 182,000 sq ft of tenant acquisitions. For the second year running, CBRE emerges as the top agency for London office investment activity, advising on just over £4bn to secure a 22% market share – a slight increase on the 21% market share it achieved in 2018. Cushman & Wakefield leapfrogged JLL to secure second place with £3.2bn of investment transactions giving it an 18% share of the market. CBRE and Cushman & Wakefield both acted on the only deal of the year to exceed the £1bn mark – Citigroup’s purchase of 25 Canada Square, E14 – but CBRE also acted for Lazari Investments on its £277m purchase of 23 Savile Row, W1, and for Gaw Capital on the £220.5m disposal of Waterside House, W2. Knight Frank jumped from seventh place in 2018 to fourth on this occasion, helped by its involvement in the recent £355m deal at Leadenhall Triangle, on which Cushman & Wakefield also acted. A special mention goes to Allsop which, for the second consecutive year, finished in 11th place in the annual league table – but improved its market share from 1.6% to 3.5% over the course of the past 12 months. To send feedback, e-mail graham.shone@egi.co.uk or tweet @GShoneEG or @estatesgazette Photo: London From The Rooftops/Bav Media/Shutterstock