Could vacancy rates impact your next office move?

Let’s face it, moving office is not a regular occurrence, with most businesses moving every 5-10 years. For many businesses approaching a lease expiry, there tends to be a natural expectation that there will be plenty of opportunities out there to quickly and easily find the next office space that is right for you.

Not so. The current dynamics of the London office market are characterised by high demand coupled with a lack of supply, and therefore a historically low level of vacant office space available. Let me first outline what we are seeing in the market and then recommend what you can do about it.

Recent reports on the London office market have highlighted that the lingering uncertainty has dampened the appetite among investors. Despite falls in the pound this year which has increased the investment case for London amongst overseas investors, stock shortages, economic and political turbulence and investor caution have all combined to hold down investment volumes. BNP Paribas has reported that central London transactions are down more than 40% on the previous H1 five-year average, with investors and owners unmotivated to transact while the “fog of Brexit” remains. 

On the other hand, demand from the occupier market has held up particularly well, supported by strong jobs growth and an unemployment rate at 3.8%, its lowest level since 1974. Typically, the occupier and investment markets are strongly aligned, however, BNP Paribas points to a divergence which has manifested in the London market over the last two quarters.

These stable levels of take-up by occupiers, coupled with sluggish delivery of new supply, has meant that London-wide vacancy rates have dipped below 5% for the first time in over two years, according to Colliers International. In addition, Colliers says a lack of new-build supply is also driving rental growth, leading to the first increase in prime rents for three years. Average rents rose 4% to £72.50 per square feet in the first half of this year; however typical incentives have remained unchanged at 24 months’ rent-free on a 10-year term.

In the City, a lack of Grade space has put upward pressure on prime rents, according to BNP Paribas, with rents rising to £69.50 per square foot in Q2 this year. Positively, for occupiers, however, the vacancy rate rose to 6.8% in Q2, providing occupiers with more choice in a supply-constrained market. In contrast, vacancy rates in the West End have continued to decline, reaching 3.6% in Q2, well below the long term quarterly average of 5.6%, with prime rents at £112.50 per square foot.

Supply in Midtown also fell in Q2, down 20% on the first quarter of this year, and significantly below the long term quarterly average. BNP Paribas calculates a vacancy rate for Midtown at 4.0%, however prime rents have remained static at £65.00 per square foot.

The situation in Southbank and Docklands creates an interesting contrast. Comparing BNP Paribas figures, supply in Southbank remains the most supply-constrained market in Central London with a vacancy rate of just 2.0%, and prime rents of £67.50 per square foot. Contrast this with the Docklands, where supply fell marginally in Q2 this year, but vacancy rates stand at 9.7%, and prime rents in Canary Wharf are £48.50 per square foot. This very much reflects our experience with clients, who are happy to pay more for the vibrant feel and good transport links in Southwark, compared to the more clinical and isolated atmosphere in the Docklands.

So what does this environment mean for businesses that are looking to move office?

Well, low vacancy rates mean you have to begin your property search much earlier if you want to find the ideal space. We now recommend that clients looking for spaces under 5,000 square feet need to start their decision-making process at least 6 months before their lease expiry. For properties between 5,000-15,000 square feet, you should begin the process up to one year ahead. And, for bigger office spaces, an 18-month time frame would be very sensible in order to provide the widest choice available.

Raymond James Project

At Cityspace, we help many clients at the early stage in finding the office that is right for them. Using our extensive property database, we’re able to very quickly provide clients with a range of choices, looking at both on and off-market opportunities. And for any opportunities identified, our Evaluation Report can help clients with their decision making by giving them a clear view of potential costs and timeframe, plus assist them in negotiating the most favourable terms on their new lease.

To find out more, please contact the Cityspace team on info@cityspacemanagement.co.uk.