London’s office supply crunch
London’s office market remains supply-starved, particularly for larger occupiers. In fact, this has been the case for the last 10 years, ever since banks scaled back commercial development financing in the wake of the Global Financial Crisis.
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This is best reflected in the fact that we are currently tracking 30 businesses seeking over 100,000 sq ft; however there are just 16 buildings in London that can service their requirements.
The shortage of space also means some occupiers are increasingly footloose. Put simply, businesses will be drawn to wherever quality space is available. And so it is unsurprising that they are willing to consider moving from their existing locations in search of the right space.
"We are currently tracking 30 businesses seeking over 100,000 sq ft; however there are just 16 buildings in London that can service their requirements"
However, some of these moves, we believe, would have occurred even without a dearth of supply, as the type of product some businesses are seeking has changed.
The severity of the shortage is demonstrated through the high level of pre-leasing activity that is taking place while buildings are still being built. About 50% of all office space under construction across London is already committed.
No relief from supply crunch
Looking ahead at the development pipeline, we are currently tracking almost 13 million sq ft of office space under construction, 48.6% of which is already spoken for. And with no relief in sight from the current dearth of options in the market, regearing is already becoming a popular option for those unable to find the space they desire.
Others are carrying out market reconnaissance missions far earlier than they have done historically, with pre-let commitments rapidly becoming the norm. In fact, space being delivered speculatively stood at 28.3%, sharply down on the 30 year average of 48.6%.
Signs of a structural change?
The rising volume of pre-leasing in the market certainly hints towards structural changes that will likely lead to more build-to-suit developments, particularly for larger requirements. That aside, with environmental, social and governance (ESG) considerations playing a growing role in boardroom discussions, issues such as workplace wellbeing, a building’s environmental credentials and the amount of flexible space on offer in a building are also rising rapidly in importance.
So while the dearth of supply may well pave the way for a build-to-suit revolution, rents will also be driven upwards. In fact, the supply shortage is a key consideration in our forecasts, which indicate a double digit rise across the board over the next five years in all London submarkets. The City Core (20%), Fitzrovia (16.3%) and Soho (16.3%) are forecast to experience the strongest rent rises.