LOMA Q4 2016: Analysis – offices drop by 25% but rate of descent slows

The latest take-up figures, submarket analysis and availability rates in the London offices market covering 2016 Tweet your reactions to @estatesgazette It has a been a roller coaster year for the London office market. After a dire Q2 and Q3 following the referendum vote, London offices started to show signs that the fall was at least slowing in Q4. Photofusion/REX/Shutterstock Those devastating middle quarters took their toll on year-end numbers. In the end, total take-up for 2016 was 10.7m sq ft, plummeting by 24% on 2015; 10.3% down on the five-year average. SEE ALSO: London Offices Market Analysis: Q3 2016 Take-up dropped off in both the lead up to and immediate aftermath of what turned out to be the largest macro-economic shock in decades. Occupiers took 44% less space in Q2 than the year before, and 37% less in Q3, as they shied away from a suddenly very uncertain London leasing market, according to EG’s London Offices Research. But six months after the referendum vote, as it becomes apparent that the world will keep turning and in light of surprisingly upbeat economic figures, the year was rounded out with a strong fourth quarter. Take-up of 3.5m sq ft was 62% up on Q3, and 16% down on Q4 2015. Does that mean we can come out of the bunkers? There is clearly quite a bit of relief around the Q4 stats. “The fact prime City rents began with a seven and finished with a seven, unless there is a very delayed aftershock to Brexit, to me suggests a very credible performance indeed,” says Dan Gaunt, partner and head of city agency at Knight Frank. The jury is still out on what the long-term effects will be, but the consensus seems to be it is all going to take such a long time to sort out occupiers still need to take space. In 2016, there were 37 disposals over 50,000 sq ft, and 15 ended up being in the fourth quarter. It seems to me that if the world is willing to join us in being a basket case, we remain in our pre-eminent position.” David Hanrahan, director and co-head of London offices at Colliers International In truth the slowdown had already begun in 2015. Chris Vydra, executive director and head of City leasing at CBRE, says: “We were coming to the end of the cycle and the referendum halted it more quickly than it would have, but the market has now settled. For tenants, being in or out of the EU is just one of a number of macro challenges on the horizon. London offices market analysis presentation: Q4 2016 AVERAGE LONDON OFFICE RENTS BY SUBMARKET Q3 v Q4 Sub market Location Av rent Q3 (£) Av rent Q4 (£) City Core Gresham St/Leadenhall St/Broadgate 69.50 69.25 City fringe Aldgate 57.38 56.75 Midtown Chancery Lane 67.61 68.07 Midtown Covent Garden 81.93 82.07 Midtown Euston Road 70.29 70.29 West End Mayfair/ St James 121.67 118.75 West End Victoria 80.21 79.17 West End Soho 86.04 87.08 West End Paddington 65.50 65.83 South Bank More London 63.39 64.29 Docklands Canary Wharf 45.50 46.08 Major banks pull London jobs High Level/REX/Shutterstock Announcements made by banks following prime minister Theresa May’s Brexit speech last week will have put many on edge. The future of Goldman Sachs, UBS and HSBC in the UK could and should not be taken lightly by anyone. Many are hopeful others occupiers will take up the slack. “We saw more take-up from media and tech than finance for only the second time ever,” says Elaine Rossall, head of EMEA capital markets research at Cushman and Wakefield. She points to the announcements over the year which rivalled those of 2013, with Apple and Facebook taking space, and Google confirming its King’s Cross move. But bullish end-of-year moods aside, there is still a lot to be worried about. Lease events favour tenants Lease events moved very much into the favour of tenants, with rent frees growing by a couple of months over the year. Rents also started to soften in some of the prime markets. “The top end of the market has seen an impact in terms of headline rents and certainly we have seen more incentives, with rent frees and headline rents at the top end,” says JLL’s director of office’s research, Ben Burston. For the moment this has not overly concerned people – Burston says that outside of the top end, rents have held up very well – but if it continues it will deter investors. Another growing trend seemed to be the amount of tenant-controlled space returning to the market. The mammoth merger of CMS, Nabarro and Olswang was big news for Cannon Place, EC4, but it meant the sudden release of over 200,000 sq ft onto the market. Meanwhile, the sub-let by Barclays of 536,398 sq ft to the Government Property Unit at 10 South Colonnade, E14, was the year’s largest letting. Digby Flower, chairman at Cushman and Wakefield, points out that the finance and later professional services sectors started off and north shoring years ago and have long been “net consolidators”. “But they are being replaced by media and tech, and then the flexible working piece,” he says. TAKE-UP BY TENANT TYPE Sector Sq ft Central & local government 598,199 Financial 576,030 TMT 549,949 Property 461,650 Professional 247,938 Retail & leisure 170,424 Insurance 90,439 Services 84,718 Industry & manufacturing 70,637 Construction 60,779 Associations 40,778 Health & education 29,604 Massive lack of supply But they are still a worry because they represent an unknown in the one area that is universally helping confidence: a massive lack of supply. “I just think that the market is in a stronger place than it has been at previous inflection points. When we have gone into previous inflection points, the vacancy rate has been much higher than now,” says Flower. Availability rates shifted out slightly from 4.3% in Q4 2015 to 5.8% by the end of the year but have hardly shifted quarter on quarter. Is that enough to bring the roller coaster ride to an end? Few will be banking on a soft landing just yet but for now most seem content that the white knuckle ride has at least slowed to a more comfortable pace. Take-up across the sub markets QUARTERLY TAKE-UP Q3/Q4 Q3 2016 (sq ft) Q4 2016 (sq ft) % change q/q % change y/y City core 672,696 1,217,916 81% 33.8% City fringe 339,036 395,835 16.8% -29.5% Docklands 108,047 623,106 476.7% 144.7% Midtown 286,595 376,507 31.4% -48.1% South Bank 142,895 310,420 117.2% -2.3% West End 557,123 566,108 1.6% -59.2% ANNUAL TAKE-UP Q3/Q4 2015 (sq ft) 2016 (sq ft) % change y/y City core 4,082,817 3,390,858 – 16.9% City fringe 2,218,782 1,578,600 – 28.9% Docklands 1,218,994 1,288,983 5.7% Midtown 2,509,122 1,426,072 – 43.2% South Bank 664,199 696,415 4.9% West End 3,350,761 2,275,753 – 32.1% • To send feedback, e-mail alex.peace@estatesgazette.com or tweet @egalexpeace or @estatesgazette LONDON OFFICES MARKET ANALYSIS Q4 2016   • Analysis – offices drop by 25% but rate of descent slows • Who is London’s top office agent? • London offices breakdown by submarket • London office investment down by 25% in 2016 • Who is London’s top Q4 agent? • Four things you need to know about the London offices market RELATED ARTICLES   • London Offices Market Analysis: Q3 2016 Take-up fell by more than a third in Q3 year on year and investment plunged to record lows. Is it a sharp shock post the Brexit vote or a sign of worse things to come?  • CBRE takes Q3 2016 London office crown Top 25 agents revealed amid EU referendum slowdown • London Offices Market Analysis: Q2 2016 • London Offices Market Analysis: Q1 2016