City Floor Review Q1 2016 - Gerald Eve

FLOOR REVIEW. A floor-by-floor analysis of the City office market. Q1 2016 ... deals were agreed at or above £70 per sq ft ... This sub-market has the best.
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CITY FLOOR REVIEW A floor-by-floor analysis of the City office market Q1 2016

QUARTERLY SUMMARY • • • • • •

Take-up rises 31% on the quarter Occupiers in the financial services sector account for 37% of the market Two lettings agreed over 100,000 sq ft in size Availability rises 18%, driven by new space being delivered in Q2/Q3 Prime rents rise for sixth consecutive quarter to £70 per sq ft Pre-lets continue to erode space in development pipeline

FIRST QUARTER REVIEW

THE QUARTER IN NUMBERS

Q ON Q

Y ON Y

433 floors available, totalling 2.66 million sq ft

+24% by floors (+18% by sq ft)

+16% by floors (-10% by sq ft)

244 floors taken-up during Q1, totalling 1.69 million sq ft

33% by floors (+31% by sq ft)

+4% by floors (+8% by sq ft)

148 floors under offer totalling 0.94 million sq ft

12% by floors (-3% by sq ft)

-5% by floors (-2% by sq ft)

6,940 sq ft average size of floor taken-up

7,048 sq ft

6,731 sq ft

£70 per sq ft City prime headline rents

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£68 per sq ft

£63.50 per sq ft

COMMENT By volume, supply in the City has risen by 18% on the quarter, but is still down 10% on the year. The addition of half a million sq ft to current supply from the development pipeline, is the main driver of this increase. The amount of unrefurbished stock on the market only posted a marginal increase on the quarter. There were no real signs of pre-referendum uncertainty in the City occupational market in Q1 with volumes up 31% on the quarter. Regionally it was EC2 which drove volumes – accounting for 47% of all take-up, and sectorally, it was Financial Services which was the dominant occupying sector accounting for 37% of all take-up. The amount of space under offer rose slightly at the end of Q1. Just over a quarter of the space under offer in the City is on buildings in the development pipeline. Occupier interest in 33 Central and 1 Aylesbury Street is likely to further erode the amount of new space coming to the market in 2017. The average size of floor transacted remained high during Q1. Jeffries pre-let several large floors at 100 Bishopsgate, which helped drive up this total, but large floorplates were taken across all postcodes in Q1 as 61 floors over 10,000 sq ft in size were let. Prime headline rents increased for the sixth consecutive quarter in Q1. Several prime deals were agreed at or above £70 per sq ft during Q1 as a range of companies including asset managers, law firms and those in the technology sector agreed to pay the rents necessary to secure the best space.

TAKE-UP

Quarterly take-up by postcode and 3 year average

The letting market rebounded at the start of 2016, following a drop in activity at the end of 2015. There were seemingly no signs of occupier apprehension about the outcome of the UK referendum, as several financial services companies, including investment banks, committed to space in the City. With this said, the deals completing in Q1 are likely to have been agreed several months prior, perhaps even before the referendum date had been set.

% 2.0 1.8 1.6 1.4 1.2 1.0

The theme of more space being taken out of the development pipeline through pre-letting activity continued during Q1 as floors 7 and 8 were taken by Adobe at the White Collar Factory in EC1 (28,782 sq ft) and Jeffries pre-let floors 11-15 at 100 Bishopsgate (117,391 sq ft).

0.8 0.6 0.4 0.2 0.0 Q2 2014

EC1 EC2

Q3 2014

EC3 EC4

Q4 2014

Q1 2015

Q2 2015

Q3 2015

Q4 2015

Q1 2016

3 year average

Q1 2016 take-up by occupier sector

TMT 19%

37% Financial Services Serviced Offices 11%

Property 6% Other Professional 2% Other Corporates 12%

3% Insurance 10% Legal

Financial services companies accounted for 37% of take-up and include those in traditional investment banking, wealth and asset management sectors as well as peer-to-peer lenders such as ratesetter.com committed to space in Q1. We have found the activities of certain types of companies – such as those in the ‘fintech’ sector have blurred the lines between different occupational sectors. Letting activity from companies such as Stripe Payments UK, who let 12,260 sq ft on the 7th floor at 207-211 Old Street is a case in point. Serviced office providers continue to be a pivotal part of letting activity in the City, accounting for 11% of all take-up in Q1. The largest transaction in the sector agreed during Q1 was WeWork’s letting of the 83,837 sq ft at 145 City Road.

Q1 2016 SUPPLY Here we detail our findings on the supply of floors by each postcode, indicating the number of available floors for each floor size category as well as the respective quality of each available floor.

SUPPLY 433 floors 24% on Q4

UNDER OFFERS

2.66m sq ft 18% on Q4

148 floors 12% on Q4

0.94m sq ft 3% on Q4

EC1 ANGEL

This remains the most undersupplied postcode in the City. 49% of the space on the market is unrefurbished and the average size of floor on the market is 5,514 sq ft– the smallest out of all sub-markets.

CIT Y

RO AD

Floor size (sq ft) OLD STREET

2,501-4,000

ROAD

EC1

4,001-7,000 7,001-10,000

ELL

GOSW

1,000-2,500

OLD

STR

66 ,9 9

10,001-20,000

EC1

70

Number of available floors

60

NWELL

CLERKE

ROAD

4 sq ft 59,74 101,421 sq ft

80

ft

10

ft sq

0

90

ft sq

1

94 ,53 54,1 38 sq

4

20,001+

20

30

40

50

CHANCERY LANE A40 HOL

BORN

LONDON WALL

EC2

ST BARTHOLOMEW’S HOSPITAL

N ROAD

839

DO FARRING

78 ,

EET

s q ft

ST PAUL’S

FLEET STREET ST PAUL’S

EC4

MILLENIUM BRIDGE

Floor size (sq ft) 1,000-2,500 2,501-4,000 4,001-7,000 7,001-10,000

70

Number of available floors

60

20

30

242,910 sq ft

EC4

sq f t

10

80

ft

136 ,02 9

ft sq

Sub-market boundary

0

ft sq

90

9 sq ,84 24 ft sq

20,001+

Unrefurbished City boundary

69 ,4 6

10,001-20,000

1

Refurbished

6 ,33 40

New

40

14

0,7

68

50

Source: Gerald Eve Arrows indicate quarterly movement in the number of floors.

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MANSION HOUSE

EC4 This sub-market has the best quality of choice on offer to occupiers as 83% of the space being marketed is either new or refurbished. The expected completion of developments at Cannon Green, 27 Bush Lane and 45 Cannon Street over the next 6 months has ensured that the quality of choice in the short term looks set to remain high.

RIVER THA MES

Floor size (sq ft) 1,000-2,500 2,501-4,000 4,001-7,000 7,001-10,000 10,001-20,000 20,001+

Number of available floors

ft

50

30

Both the volume of space and number of floors on the market increased in Q1 following the addition of several large floors from development supply which are due to complete over the next 6 months.

ft

40

120,490 sq

70

20

68,298 sq ft

EC2

ft ,636 sq 143 329,541 sq

10

80

60

EC2

49,4 60 sq ft

90

0

GR

EA T

EA

ST

ER

N

ST R

EE

T

ft

SHOREDITCH HIGH ST

64

,35

2

sq

SPITALFIELDS

EC3 Following increased levels of take-up, supply fell marginally during Q1. 74% of the space marketed is either new or refurbished, and by volume, most space is in the 10,00020,000 sq ft category, given the expected completion of the Monument Building next quarter.

LON

DON WAL

L

EC3 Floor size (sq ft) 1,000-2,500

STREET

2,501-4,000 ST KATHERINE DOCKS

4,001-7,000 7,001-10,000 10,001-20,000

8

40

50

9 s q ft

30

4 7 ,0 0

60

20

1 0 3 , 1 4 0 s q ft

Number of available floors

q ft

EC3

70

5s

80

,75

10

s q ft

0

06

90

ft sq

RIV ER TH AM ES

110 ,00 6

q ft 0s 67 6,

20,001+

95

RIVE R TH AMES

1,8

THAMES

33

LOWER

DEVELOPMENT PIPELINE AND RENTS

Here we breakdown by postcode sector the outlook for development supply to 2018. The pre-letting activity seen so far in 2016 has taken further space out of the development supply pipeline and the limited supply of new space coming on to the market continues to support further prime rental growth.

DEVELOPMENT SUPPLY PIPELINE BY POSTCODE Million sq ft

Million sq ft

0.6

0.5

0.6

EC1

0.5

0.4

32

EC2

0.4

0.3

0.3

28

32 24

0.2

0.1

0.2

0.1

21

0

0 Q4 2016

H1 2017

H2 2017

H1 2018

H2 2018

Q4 2016

Million sq ft

H1 2017

H2 2017

H1 2018

H2 2018

Million sq ft

0.6

0.5

11

0.6

EC4

0.5

EC3

0.4

0.4

0.3

0.3

55

29

17

16

0.2

0.2

0.1

0.1

18 7

0

0 Q4 2016

H1 2017

H2 2017

H1 2018

H2 2018

Q4 2016

H1 2017

H2 2017

H1 2018

H2 2018

Number of Floors

There were a handful of deals agreed at elevated rents during Q1 – such as the letting of 10,672 sq ft on the 33rd floor at 122 Leadenhall Street to Quadrature Capital Ltd and Proskauer Rose’s letting of 5,012 sq ft on the 21st floor at 110 Bishopsgate at £72.50 per sq ft. The Jampur Group also reportedly let the 16th floor at 200 Aldersgate at a rent of over £80 per sq ft. Such evidence, when combined with the increase in demand and increase in quality of available space on the market has meant that prime rents have risen for the sixth consecutive quarter to £70 per sq ft.

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There are a number of large requirements for space in the market, such as LinkedIn, who are looking for 80,000 sq ft of space in EC1 and Freshfields Bruckhaus Deringer who have shortlisted four properties in the core postcodes for 300,000 sq ft of office space – including 100 Bishopsgate and 2 and 3 Finsbury Avenue Square. Such large requirements are likely to take more space out of the pipeline and helps support future rental growth, albeit a potential slowdown in activity in the lead-up to the UK referendum could restrict the rate of this growth.

£70.00

per sq ft

PRIME HEADLINE RENTS Q1 2016

DEFINITIONS

Availability Floorspace over 1,000 sq ft in size and available to move into within six months which may or may not be vacant but which is actively marketed by an appointed agent. We monitor availability in central London at an individual floor level as well as by the total volume of space. Each floor is assigned a floor size category and is graded for quality. The availability data covered in this report represents buildings within the postcodes EC1, EC2, EC3 and EC4, as depicted in the map. The floor area in sq ft adopted throughout is the net internal area. Newly available space Space on the open market (including developments) which are within 6 months of completion. This includes units of secondhand space which are undergoing refurbishment. Requirement A declared requirement for office accommodation with appointed agents, which needs to be satisfied in the foreseeable future. Our requirements data covers all of the postcodes EC1, EC2, EC3 and EC4, unless otherwise stated. If the requirement has a preferred size ‘range’, the average size of the requirement is used. Given requirements often include a range of targeted geographies, we have included the requirement for each of the sub-markets when analysing individual sub-markets, but, when calculating overall City requirements, duplicates are removed. Prime headline rents The rent being paid which may not take account of concessions such as rent free periods or other incentives. We have adopted the ‘best achieved’ methodology and where there is no evidence; rents are recorded on the basis of the best hypothetical transaction which could be achieved at the end of that quarter. Our definition of a prime transaction covers a 10,000 sq ft office in a low rise, grade A building signed on a ten year lease. ‘Tower’ rents refers to the same floor size and profile but within a high rise tower building.

Refurbished: A floor which has been comprehensively refurbished and is of good specification, floorplate efficiency and image, but is in a building which is not new or been comprehensively refurbished. Unrefurbished: Poorer quality space, usually offered for occupation ‘as is’. Under offer Space which a prospective occupier has agreed in principle to occupy, but is most likely to not as yet be under any legal or contractual obligation to do so. Take-up Occupational transactions including offices let or sold to an occupier, developments pre-let or pre-sold to an occupier or an owner occupier purchase of a freehold or long leasehold. Quality of choice This is a subjective measure holistically assessing the appropriateness of current availability to modern office requirements. Whilst our figures may represent a large number of floors available in particular size categories or postcode geographies, the floorplate efficiencies or amenities on offer within this supply may not meet all the expectations of modern office tenants and the quality of choice would be lower. Floor / Floorplate As well as the total volume of space being marketed as available, we also monitor the number of floors which account for this total volume. We monitor whether it is a full floor or part floor which is being marketed, although for our statistics, we treat an individuallymarketed ‘part’ floor as ‘one’ floor. If a floor is capable of subdivision to accommodate two suites, but can likewise be occupied together, we use the total floor plate for that floor. Net absorption

Incentives This refers to the concessions offered by a landlord to a tenant as part of the negotiation process. Incentives usually adopt the form of rent free periods, but can also be in the form of capital contributions or the fit-out of the building. Future supply This is essentially a review of development due to be delivered to the market and does not include space bought to the market in the future due to lease expiries or the natural churn of stock. We cover those floors over 1,000 sq ft in size which are being developed and are due to be delivered to the market. Floor quality New: Floor in a newly-developed or newly-refurbished building, including sub-let space in new buildings which have not been previously occupied.

This measures the net overall balance of occupied space over a prescribed time period. We calculate net absorption by subtracting the change in available space (both by the number of floors and the overall volume of space) between two time periods from the amount of development completions added to the market within the same time period. For our calculation we assume that all available space is ‘vacant’ on the premise that space that is marketed as being available is underused and likely to be vacated. Known sub-let space and lease renewals are not factored into net absorption except where the lease renewal includes the leasing of additional space, and then that additional space is counted. Pre-letting of space in non-existing buildings is not counted in net absorption until the development is completed and the tenant takes occupation.

CONTACTS Gerald Eve’s City team provides specialist advice across a number of disciplines including agency, investment, lease consultancy, rating, valuation, planning and development and project management. To find out more about us and what we could do for you please visit our website (www.geraldeve.com) or contact the following people direct.

CITY Simon Prichard Senior Partner Tel. +44 (0)20 7653 6827 Mobile +44(0)7796 930334 [email protected]

Fergus Jagger Office Agency Tel. +44 (0)20 7653 6831 Mobile +44 (0)7787 558756 [email protected]

Mark Lethbridge Office Agency Tel. +44 (0)20 7653 6833 Mobile +44 (0)7710 618022 [email protected]

Paul Pride Office Agency Tel. +44 (0)20 7333 6249 Mobile +44 (0)7584 213455 [email protected]

Graham Foster Lease Consultancy Tel. +44 (0)20 7653 6832 Mobile +44 (0)7774 823663 [email protected]

Lisa Webb Planning Tel. +44 (0)20 7333 6225 Mobile +44 (0)7747 607309 [email protected]

Jeremy Randall Planning Tel. +44 (0)20 7333 6328 Mobile +44 (0)7768 617235 [email protected]

WEST END Lloyd Davies Investment Tel. +44 (0)20 7333 6242 Mobile +44 (0)7767 311 254 [email protected]

PLANNING & DEVELOPMENT Hugh Bullock Head of Planning and Development Tel. +44 (0)20 7333 6302 Mobile +44 (0)7831 172974 [email protected]

GERALD EVE’S UK OFFICE NETWORK London (City) 46 Bow Lane London EC4M 9DL Tel. +44 (0)20 7489 8900

Glasgow 140 West George Street Glasgow G2 2HG Tel. +44 (0)141 221 6397

London (West End) 72 Welbeck Street London W1G 0AY Tel. +44 (0)20 7493 3338

Leeds 1 York Place Leeds LS1 2DR Tel. +44 (0)113 244 0708

Birmingham Bank House 8 Cherry Street Birmingham B2 5AL Tel. +44 (0)121 616 4800

Manchester No1 Marsden Street Manchester M2 1HW Tel. +44 (0)161 830 7070

Cardiff 32 Windsor Place Cardiff CF103BZ Tel. +44 (0)29 2038 8044

Milton Keynes Avebury House 201-249 Avebury Boulevard Milton Keynes MK9 1AU Tel. +44 (0)1908 685950

Disclaimer & copyright This brochure is a short summary and is not intended to be definitive advice. No responsibility can be accepted for loss or damage caused by reliance on it. © All rights reserved The reproduction of the whole or part of this publication is strictly prohibited without permission from Gerald Eve LLP. 05/16

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West Malling 35 Kings Hill Avenue West Malling Kent ME19 4DN Tel. +44 (0)1732 229423

For more information on any of the facts and figures in this publication, please contact: Steve Sharman Tel. +44 (0)20 7333 6271 ssharman­@geraldeve.com