Ever since I can recall, London Office Quarterly analyses have shown that the most active occupier types for take-up are financial and technology firms – usually occupying the first and second positions, only occasionally suffering at the hands of an interloping sector by way of a significant individual letting.
However, looking more forensically at the market over the last three years indicates that it is actually serviced offices that are far and away the leading business type when it comes to filling space.
Vacations from, for example, technology, media and telecommunications businesses since March 2016 have meant that only a net gain of 533,300 sq ft of tech occupation in London has been seen in the last three years. If Facebook’s mammoth pre-letting at King’s Cross, N1, had not occurred in the middle of last year, there would have been a net reduction in the amount of square footage occupied by those firms.
The same pattern can be seen for the central and local government sector, which has seen a net gain of 690,800 sq ft; underpinned enormously by the Chinese Embassy deal last year and the Government Property Unit deal in late 2016.
The TMT sector also shows the highest number of individual firms displaying a ‘consolidatory’ approach to their London office footprint – with more than 1,000 companies vacating more space in the last three years than they have taken; compared with around 750 showing an ‘expansive’ trend – ie, taking more space than they have vacated.
Serviced offices are the only sub-section of occupier types within the analysis for which the opposite is true in volume terms – 43 firms have expanded in the last three years; with 15 having reduced their London office footprint.
It is also those business types that have underpinned the maintenance of London’s occupied space; having seen 3.5m sq ft of additional floorspace occupied than at this point three years ago. Financial firms, by contrast, have vacated nearly 2m sq ft more than they have taken since March 2016.
Brexit is partially responsible for this – especially given the lack of both clarity and assurances from both Whitehall and Brussels over how smoothly British-based financial businesses will be able to conduct cross-border operations with EU nations once the divorce is finally complete. The pound jumped in late October last year when stories emerged of an agreement on trade in financial services – and that the EU negotiators had given the green light for UK finance businesses to be given continued access via applying ‘equivalence’; however, both sides then quickly moved to dispel any notion that this was the case.
Since then, there has been precious little emerging on how exactly the future trading relationship will work – and, in truth, there has been nothing substantive during the last three years apart from lip-service to give businesses the clarity required to make long-term decisions.
That goes some way to explain why firms in that sector have been slower to enact requirements for London office space while, in the background, consolidation and recalibration of business space has taken place across the financial sector in a similar vein to that seen in the professional, associations and insurance sectors over the last three years.
As London’s occupational sphere becomes more democratised, with specific business sectors no longer monopolising submarkets, firms are now looking to contain their physical office operations into fewer individual units, thereby reducing overall space requirements for core business. Technology and transport advancements have also rendered proximity less critical for location-based decisions; and so individual hubs are now preferable to a scattering of smaller office units.
The comparative ‘net expansion’ of the serviced office sector far and above any other business type speaks to how occupiers are seeking to split their physical office space between core operations within spaces acquired through the traditional leasing arrangements and additional flexible space enabling more agility to respond to new projects.
This overarching desire emanating from occupiers of all types has enabled those serviced office providers to proliferate at a greater rate than any other sector – and also underpins the desire of the wider landlord class to consider their own provision of serviced or flexible space – as evidenced by moves from Landsec and the Crown Estate last year; and British Land in 2017.
There may be a ‘fightback’ of sorts on the occupational front from the finance sector soon, given that there is a significant weight of demand for space within the capital, but once again it is fair to say that an unfavourable end to the Brexit process would temper this somewhat, and leave the London office market continuing to lean on serviced offices and large-scale TMT deals to drive further net occupation.
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