London office market analysis: Top agents revealed

London’s office market enjoyed a strong end to 2018 with occupational activity boosted by a swell of transactions in the final quarter, and investors retaining their interest in the capital despite seemingly endless political headwinds. We ask: what do the deeper trends indicate? Which parts of London seem most resilient? And which agents have triumphed in the battle for market share? Radius Data Exchange figures show that London office take-up in Q4 totalled 3.84m sq ft – a jump of 11% on the previous quarter, and almost exactly on par with the same period last year. This total reflects an 18% rise on the five-year quarterly average and a 30% increase on the 10-year average. This sprint finish was anchored by the City Core and West End submarkets – both of which saw more than 1m sq ft transacted during the three-month period, which is the first time both have achieved this in the same quarter since Q3 2007. These strong performances helped to counterbalance a quieter end to the year in the Docklands and City Fringe submarkets, where activity was 72% and 12% below the respective five-year averages. Previous quarterly analyses in 2018 have detailed how robust occupational performance has hinged on historically large deals helping to push take-up above long-term averages, and how new-build stock has dominated activity, but that was not the case in Q4. Transactional volume helped to lift the market in the final quarter, with 421 individual deals generating that 3.8m sq ft of activity – the highest volume of deals since Q4 2015. The West End and Southern Fringe submarkets either matched or bettered their historic records for overall deals volume, registering 144 and 35 individual lettings respectively during the final three months of the year. Additionally, secondhand space accounted for more than 2.4m sq ft out of everything let during Q4 – almost 65% of the overall activity within the quarter, which represents the highest proportion since Q2 2016. This means that 2018 as a whole saw just over 53% of the space transacted coming in second-hand units, after tracking at below 48% for the first nine months of the year. Read previous London Offices Market Analysis reports >> Overall take-up for 2018 finished at 13.3m sq ft – a 6% increase on 2017, and 3% above the five-year average, which includes peak years 2014 and 2015. In terms of occupier sectors driving this activity – things look remarkably similar to last year, with the top three sectors unchanged, and only minimal shifts in overall take-up share. Technology, media and telecoms was the dominant sector, with nearly a quarter of overall let space (compared with 27% last year), followed by finance, which once again commanded 16% of the occupational activity, ahead of serviced offices in third place having been responsible for 14% of overall occupier activity this year, as against 15% in 2017. The only big mover in this regard was governmental bodies – up to 5.5% from 2.6% in 2017, thanks almost entirely to the Chinese Embassy deal in Q2 at Royal Mint Court, EC3. [caption id="attachment_923918" align="aligncenter" width="847"] The Chinese embassy has completed the acquisition of Royal Mint Court, EC3, from Delancey and LRC Group to create a 600,000 sq ft campus in 2018.[/caption] What is driving occupier decisions is a desire to refresh their footprint, and getting ahead of the curve to do so, explains Dan Burn, head of City agency at JLL. “A lot of the buildings that tenants are moving out of are becoming obsolete because they’ve been in them for 15-20 years. So a lot of it is about upgrading their occupational strategy,” he says. “There is very little stock under construction speculatively that will come through post-2020, and with most active demand being lease-driven or a consolidation of multiple office spaces, occupiers that need to move are having to make the decisions earlier than they would have done in previous cycles.” Motivation for occupiers also comes from the desire to maintain a quality environment for their current staff, as well as ensuring they are well positioned to attract top talent, as Harry Badham, UK head of development at AXA Investment Management – Real Assets, explains. “For any business in central London, the future of your business and growth is about your people,” he says. “Real estate is quite a small number on a balance sheet – or a profit-and-loss account – and if you’re paying 10-20% more for a new building it’s not actually that much more in real terms, but the impact on your staff and your ability to recruit, retain and get the best productivity out of your staff is huge.” Supply rate shift The supply rate moved inwards against last quarter as a result of strong occupational activity, with the figure for the whole of central London now at 6.8% – just about where it was at the start of 2017. Going more forensically into the availability rate data betrays some mixed performance across submarkets – with Docklands’ balance of availability against standing stock now at 12.9%, the highest it has been since early 2005. We reported in the middle of last year on a relatively quiet 18 months for the Docklands submarket, and after a bumper third quarter in which 289,000 sq ft transacted, Q4 was a reversion to quietude, with only 65,000 sq ft let, causing the outward drift of quarter-on-quarter supply rate. Conversely, the City Core and West End submarkets are showing their most acute scarcity levels since the end of 2016, with availability rates of 6.5% and 6.1% respectively, following their strong transactional performance in Q4. Availability: size matters Availability across London at year-end reflects a continuation of what we saw throughout 2017, which is that landlords are struggling to let smaller spaces, with the ever-growing appeal and expansion of serviced offices acting as a decelerative factor in take-up of smaller units in traditional office premises. Spaces measuring less than 10,000 sq ft comprise 78.4% of the currently marketed units – slightly higher than at the end of last year, which itself was a five-year peak for smaller units dominating availability. Looking deeper into the supply of smaller units – 91% of them are secondhand, compared with 66% of the larger units. That may not be too surprising, given that newer spaces tend to appeal to bigger occupiers and be marketed as such, but the deeper statistical patterns underpinning this year’s strong recovery in the occupational market show the important dichotomy between the performance of secondhand space in these size bands. Overall take-up across units measuring above 10,000 sq ft has seen an 8% increase on 2017, whereas occupational activity in smaller spaces has only increased by 0.4% annually. Splitting the larger units down into grades of space, secondhand take-up in units above 10,000 sq ft increased by an impressive 15%, against a 3% annual rise for new-build, under construction, or pre-marketed stock. So although it might seem like the Chinese Embassy and Facebook headline deals have anchored London’s take-up recovery this year, it is actually the less glamorous deals that have had a greater impact, especially in Q4. [caption id="attachment_935928" align="aligncenter" width="847"] Facebook has finalised its move to a new 611,000 sq ft base at King’s Cross Central, N1 in 2018.[/caption] Furthermore, it appears that landlords have been more willing to be flexible on rental values for larger spaces, as average rents on secondhand units below 10,000 sq ft have risen by 1.5% against last year, compared with a 4.7% drop for secondhand offices of more than 10,000 sq ft. For landlords holding smaller units, this may give food for thought. Whether they are able to give the same rental flexibility for smaller spaces as was evident for larger spaces last year could be key to what happens next. In light of the sheer weight of them on the market at present, perhaps we will see more owners moving into the realm of dedicating part of their space to flexible working, rather than continuing to try to squeeze value out of units that have waning appeal. Matt Flood, commercial director at LandSec, says: “There is a real shift in how real estate and workplaces are being seen and how those occupier decisions are arrived at. Many tenants with active demand are starting to split their space requirements between a mix of core and flex, and if they can get that from the same platform and serviced provider, that’s of huge benefit to them. Our business is aiming to react to the changing ways in which occupiers consume space, and this is part of the reason we launched Myo last month.” WATCH: Crown Estate launches first co-working offer Consensus rents Looking more geographically at the rental market, our panel of agency experts have delivered their final verdict for 2018. In Q4 the City Core has seen a 1.3% increase on Q3 values, following the strong end to the year on the lettings front. The remainder of the areas considered by the panel saw either modest growth or no growth, meaning overall London rental values increased by 0.4% on Q3. Yearly figures indicate a rise of 1.4% across London offices, with a variety in performances ranging from a 2.9% dip in Mayfair to a 6.1% increase in Paddington. [caption id="attachment_964008" align="aligncenter" width="4000"] Click to enlarge[/caption] We began canvassing the consensus rental panel in 2013, and this latest fall in Mayfair and St James’s means that the industry experts are indicating that the area is now commanding lower rental tone for the hypothetical lease than five years ago, with an average of £105.80 per sq ft in Q4 2018 against £107 per sq ft at the end of 2013. The chart below indicates how Mayfair compares with other areas in this regard. Mayfair figures for Q4 in isolation showed an uptick on Q3 – the first quarterly growth since Q1 2016. Bearing this in mind, it is entirely possible that rents were unsustainably high even before 2013 and are now returning to something resembling equilibrium, so it looks a little worse against maturing markets wherein organic rental growth can be (and has been) sustained against a lower base. It’s also to do with the evolution of London as a place to do business. Geographical “clustering” of specific occupier types in certain London enclaves is no longer the norm, and with a more democratised feel to the capital in terms of which occupiers fit into specific submarkets, a levelling out effect on rents is taking place. AXA’s Badham says: “The kind of very local district-based pricing is beginning to iron out across all markets. If you’re anywhere from Waterloo to Paddington to Aldgate to Borough, that chunk of central London and perhaps even further afield, including Whitechapel and Kensington and Victoria, London seems to be kind of evening out at a broad rental level. JLL’s Burn adds: “London as a playing field now is very much more open and that has been driven by the infrastructure propelled by rents with the eastwards migration of West End occupiers. It is also driven by the war for talent. A lot of the younger generation now live in east London as its more affordable, and the amenity offer in areas like Farringdon, the City, and Canary Wharf is much more enhanced from what it used to be.” Investment Total spend on central London offices in Q4 totalled £3.5bn, anchored by two big-ticket City transactions: the £411.5m deal at 30 Gresham Street, and the £385m sale of 125 Old Broad Street, both EC2. This represents a 6% increase on Q4 2017, and pushes overall investment for the year to just shy of £16.5bn – an 18% uplift on 2017, helped by 42 individual transactions above the £100m mark. The full-year total brings office investment back in line with volumes seen prior to the EU referendum, the result of which tempered activity overall despite big-ticket deals in 2016 and 2017 making overall spend figures appear more respectable. League tables CBRE leapfrogged Q3 winner JLL to take top spot in the City Core market in the final quarter of 2018, having advised on more than 560,000 sq ft of space across 23 transactions. Those included the prelet to McCann at 135 Bishopsgate, and 71,900 sq ft to Alvarez & Marsal at Park House, both EC2. JLL also acted on the McCann deal, as well as 25 further transactions to give it the quarter’s highest deal volume in the City Core, while Cushman & Wakefield and BH2’s respective positions in the top five were propelled by their joint disposal of the largest deal in the City this quarter: the 148,300 sq ft letting to Jane Street at Premier Place, EC2. Colliers International took the City Fringe leasing crown for the sixth successive quarter, having advised on more than 168,000 sq ft, securing a market share of 38%. Deals including the disposal of 22,000 sq ft to the Metropolitan Housing Trust at 77 Hatton Garden, EC1 – with CBRE and Pilcher Hershman – and 21,000 sq ft to Regus at 77-79 Farringdon Road, EC1, helped Colliers into first place, alongside a further 29 transactions brokered by the agency this quarter. JLL climbed from fifth in Q3 to second this time around, thanks largely to advising on the two largest deals in the submarket in Q4 – the 60,300 sq ft deal to Exponential-E at 100 Leman Street, E1, and 30,000 sq ft to Adidas at Herbal House, EC1. A quiet Q4 in Canary Wharf saw Cushman & Wakefield and Knight Frank hit the top of the league table with two deals concluded. Both agents acted on the 20,000 sq ft letting to Amec Foster Wheeler at 25 Canada Square, and the 17,300 let to an undisclosed occupier at 25 North Colonnade, both E14. CBRE scored its second submarket victory of the quarter by climbing from third place last time out to take the win in Q4, disposing of almost 200,000 sq ft across 14 transactions to accrue a market share of 34%. The agent acted on the biggest Midtown deal of Q4 at Athene Place, EC4, where, along with second-placed BH2, it advised on the 73,000 sq ft letting to Deloitte; as well as a 49,200 sq ft deal at the Post Building, WC1, alongside fifth-placed JLL. That deal anchored JLL’s climb from 11th place in Midtown in Q3 to feature in the top five this time, just edging Farebrother into sixth place by square footage disposed – although Farebrother was the most active by number of deals, acting on 15 individual transactions this quarter. A third win for CBRE across London’s submarkets saw it retain the quarterly West End crown by acting on 31 deals totaling just under 350,000 sq ft, and led to the agent securing a 32% market share. CBRE acted jointly with Savills on the 82,500 letting to Spaces at 25 Wilton Road, SW1, as well as 38,900 sq ft to the Premier League at 55-65 North Wharf Road, W2, along with Cushman & Wakefield. Knight Frank placed third and represented the landlord on the largest deal in the West End this quarter – the 159,000 sq ft letting to WeWork at 5 Merchant Square, W2. Union Street Partners once again claimed victory in the Southern Fringe submarket, advising on more than 135,000 sq ft across 13 deals to achieve a 47% market share. Significant to this was the largest letting in the submarket this quarter – with nearly 100,000 sq ft let to WeWork at Friars Bridge Court, on which it jointly acted with second-placed CBRE. Following its three victories across London’s submarkets, it is no surprise to see CBRE top the pile overall for disposals this quarter, with 1.3m sq ft let across 80 individual deals, taking it to a 33% market share in Q4. CBRE was one of the most notable movers in the standings, jumping from fourth place last quarter to first this time out. But there were other significant shifts as well outside the top 10, with Monmouth Dean moving up from 18th to 14th and Ashwell London climbing from 30th place in Q3 to an impressive 12th in Q4. Having advised on the two biggest transactions of the quarter, Cushman & Wakefield climbed to the top of the quarterly league table from sixth place last time – securing a 22% market share with almost £1.5bn of transactions. Close behind was CBRE, which also advised on the headline deal this quarter at 30 Gresham Street, EC2, – as well as on Southbank Central, SE1, which sold for more than £250m. BH2 completes the top three with a market share of 14%, with its largest Q4 deal coming in the form of Blackstone’s £385m sale of 125 Old Broad Street, EC2.   Full-year league tables Cushman & Wakefield clung onto the top spot it achieved last year, disposing of more than 3.8m sq ft across 226 deals in 2018 to secure a 25% market share, narrowly edging out second-placed CBRE, which ended the year with a 24% market share having acted on 3.65m sq ft. Among Cushman’s significant transactions this year were the headline-grabbing 615,000 sq ft deal to Facebook at King’s Cross, N1, on which it jointly acted with 6th placed Savills, and the 148,300 sq ft letting to Jane Street at Premier Place, EC2. The table reflects a similar top nine to last year – with BH2 the only significant mover, jumping from seventh place in 2017’s final standings to fifth this year. Jointly acting with fourth-placed Knight Frank on the mammoth deal for the Chinese Embassy at Royal Mint Court, EC3, was pivotal to this success. Colliers International remains the “busiest” agent – notching up 240 individual deals across the year, and South Bank specialist Union Street Partners comes into the top 10, having finished last year in 17th place. CBRE topped the annual league table for tenant-side activity, acquiring more than 1.9m sq ft for occupiers in 2018 across 81 individual deals, including for the Chinese Embassy. Cushman & Wakefield’s acquisition for Facebook enabled it to take second place, up from 3rd last year; while Kontor came into the top 10 this year from 12th last time, helped by two acquisitions for WeWork at Waterhouse Square, EC1, and 70 Wilson Street, EC2. CBRE stepped up to the top of the investment league table this year from second in 2017, securing a 21% market share by advising on deals valued at more than £6.7bn. It advised on the two biggest deals of the year – the £1bn sale of 5 Broadgate, EC2, and the £1bn-plus sale-and-leaseback of Goldman Sachs’ new London HQ at Plumtree Court, EC4. JLL came in second with just over £4bn of investment transactions in 2018, including the £650m disposal of Ropemaker Place, EC2; as well as acting on  Plumtree Court, EC4. Cushman & Wakefield was just behind, also acting on more than £4bn of investment activity this year. • To send feedback, e-mail graham.shone@egi.co.uk or tweet @GShoneEG or @estatesgazette