The 41.1m sq ft question: opportunity or risk?

A lot of space is subject to lease events between 2020 and 2025, but it doesn’t mean landlords will be left with unlettable buildings; it does mean they may need to work hard to attract and retain tenants The equivalent of more than 30 Shards – some 41.5m sq ft – is subject to a lease break or expiry over the next five years in central London, according to new figures from Radius Data Exchange. EG analysis shows that in central London some 480 buildings have more than 80% of net lettable space “at risk” of vacation through lease events within that five‑year period. Not all of those lease breaks and expiries will be enacted, of course, with many occupiers seeking simply to renew, re-gear, or consolidate at their existing premises. But in other cases, the buildings look ripe for replenishment. Looking at the ages of the 480 premises, more than two-thirds were either built or last refurbished before 2000; and account for roughly 19.7m sq ft of the space up for break or expiry over the next five years. Occupier demands are becoming increasingly sophisticated as we move further into the digital age, with landlords now having to make provisions for connectivity and wellbeing to ensure that their tenants are able to optimise business practices and improve the “user experience” for their employees and clients. EG’s digital connectivity report, published at MIPIM earlier this year, showed that, over the past five years, a 5% rental premium has emerged in London for office buildings with a guarantee of high connectivity. This shows the financial benefits landlords can accrue from ensuring that their spaces are capable of delivering a superior digital performance. Over the next few years, it is probable that a higher volume of office buildings will need to guarantee to occupiers that they can provide spaces that tick all boxes around sustainability, wellbeing, and digital optimisation, so some of those older “at risk” buildings – particularly those in the most sought-after locations – may well represent significant value-add opportunities for incoming landlords. Exactly how many opportunities can be derived from these older buildings (if the incumbent occupiers decide to vacate) will be partially determined by what happens with the 20m sq ft of potential new office supply that currently sits at the permission stage, as well as the eventual post-Brexit scale of occupier demand for London space. Deferments to location-based decisions and construction starts are undoubtedly happening at present, as occupiers and developers alike wait for the Westminster impasse to be resolved. Any less-desirable form of Brexit for the London market could mean that residual occupier demand would simply be “mopped up” by the new-build projects rather than fresh refurbishment opportunities afforded by vacations – depending, of course, on quality of space and precise location preferences. Looking more forensically at the data on a geographical level, Midtown is the area that is most exposed to the risk of vacations in proportionate terms; harbouring just under 7.7m sq ft of occupied space with an upcoming lease event – which equates to 22.4% of the total submarket stock. By contrast, Docklands has just 11% of its overall office footprint at risk of vacation (at 2m sq ft), with financial occupiers chiefly responsible for this – accounting for one-third of that lease event space across the submarket. Finance is also the dominant occupier sector for lease break and expiry footprint across the City core and West End submarkets; while the professional sector is the primary driver in Midtown, with technology, media and telecommunications operators the largest sector for lease event space in the City fringe and southern fringe areas. To send feedback, e-mail graham.shone@egi.co.uk or tweet @GShoneEG or @estatesgazette