The occupational market in Central London

The London occupational market continued to outperform expectations last year. Given the consistent few years of above-average take-up, Brexit uncertainty and the anticipated slowdown from Serviced Office Providers, it seemed likely that take-up would finish under the 10-year average in 2019. However, the market seemed almost unaffected by Brexit, and we didn't see any large financial institutions leave the capital. Furthermore, Serviced Office Providers continued to grow and acquire more space, which resulted in 11.1m sq ft being transacted across both the City and the West End markets. This was down on 2018 by just 13%, but remained up on the 10-year annual average by 7% and the eighth largest year on record.

At the end of 2019, we saw 6.7m sq ft of take-up in the City, which was down on 2018 by 13%, but up on the 10-year annual average by 5%. This shows the strength and resilience of the City leasing market during a year which had two Brexit block dates and a general election. The City core accounted for the majority of take-up with a 58% share during 2019. The preference for Grade A space has remained representing 81% of total take-up.

At the end of Q4, the majority of demand in 2019 actually came from Serviced Office Providers, having accounted for 23% of take-up or 1.5m sq ft across 44 deals. This is up on the whole of 2018 by 10 deals and 68% in terms of quantum of space. WeWork has been responsible for 15 of these deals alone equating to 439,693 sq ft (29% of total Serviced Office take-up), while Knotel have continued their rapid expansion from the US into London having acquired nine new centres equating to 223,112 sq ft (15% of total Serviced Office take-up). Demand from Insurance & Financial services remained strong and accounted for 20% of take-up to the end of Q4. 87% of this space has been acquired in the core. The Tech & Media sector have increased their leasing activity since the start of 2019 and represented 20% of total take-up. There has also been continued stable demand from the Professional services sector who accounted for 12%.

Take-up also remained robust in the West End with 4.5m sq ft completing across 377 transactions during 2019. This is down on 2018 by 14% in terms of quantum of space, but up on the 10-year annual average by 12%. In total, whilst the Tech & Media sector continued to account for the largest proportion of take-up (25%,) space let to Insurance & Financial sector occupiers reached a near-record level of 910,000 sq ft. This is the second highest take-up to this sector on record, only narrowly overtaken by 2007’s 920,000 sq ft. Over the past three years, we have seen year-on-year increases to the overall space acquired by Insurance & Financial sector occupiers. In total, the sector accounted for 22% of annual take-up, which is the highest proportion of annual West End take-up this sector has ever accounted for. Mindspace’s acquisition of 34,500 sq ft at the Metro Building, W6 in December, saw the total amount acquired by the Serviced Office Provider sector reach just shy of 700,000 sq ft for the year, which accounts for 17% of take-up. This is down 29% on the long-term average and is in contrast with the City, which saw serviced offices acquire more space than any other occupier type.

As a result of the strong and diverse levels of demand seen over the last two years, the central London vacancy rate has remained low in a historic context, sitting at 4.8% at the end of Q4 2019 compared to the 10-year average of 5.7%. Furthermore, if we assume that no more supply is added to the market, at the current rate of take-up, there is only approximately 13 months’ worth of supply remaining in both the City and the West End markets.

However, while the City vacancy rate is currently 5.5% and the West End at 4.4%, we believe these figures may be misleading due to the significant quantum of take-up by Serviced Office providers that have subsequently re-launched the same space back onto the market. A more accurate analysis taking into account the occupancy of serviced office centres alongside Savills Workthere team suggests 100bps could be added to each of our respective City and West End vacancy rates.

Looking forward, we expect take-up to remain slightly above the long-term average in both markets during 2020 as occupiers benefit from improved clarity from Brexit and improved political stability. We anticipate pre-letting activity to remain high as occupiers commit their long-term futures to London.

Furthermore, Oxford Economics are forecasting Greater London office-based employment to grow by 1.6% during 2020, even allowing for Brexit related job relocations. However, any decrease in Banking and Financial jobs is expected to be more than offset by increases in employment in the Information & Communication sector and the Professional, Scientific and Technology sectors.

For instance, Facebook who are already in 230,000 sq ft in 1 Rathbone Place, W1 and 90,000 sq ft in 10 Brock Street, NW1, made the decision in 2018 to pre-let 615,000 sq ft across three buildings in King’s Cross, and expanded within 10 Brock Street, NW1 in 2019 by the further acquisition of 144,000 sq ft.

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