Falling office space costs 16th February 2012

The average cost for UK companies to provide office space for their workers fell slightly during 2011 but costs in London's West End rocketed by 12.5% year-on-year, according to DTZ's annual 'Global Occupancy Costs: Offices' (GOCO) report. The West End's performance is in stark contrast to London City where redundancies and a drive towards great space utilisation among financial services companies drove costs down by 7.3%.
Now in its fifteenth year, DTZ's report assesses the main components of occupancy costs in 124 business districts in 49 countries across the globe, ranking each location based on annual costs per workstation. Occupancy costs are much more than just rent, and include outgoings such as maintenance costs and property tax. The analysis also takes into account variability of space utilisation standards by measuring costs on a per workstation basis rather than per square metre, as local customs vary.
The weakening macro outlook across the UK kept average occupancy costs per workstation stable during 2011, with a marginal average decline of 0.3%. There were marked regional differences, however, with occupiers in Birmingham benefitting from the largest cost savings with a y-o-y decrease of 11.5% to £4,250 per annum. This was followed by Edinburgh which witnessed a decrease of 4.2% to £4,790. At the other end of the scale, London's West End remains the most expensive business district in Europe, and second only to Hong Kong globally, with occupancy costs climbing to £14,530 per workstation. Behind the West End, the UK's next largest year-on-year movers were Glasgow and Manchester, both with 2.4% increases to £4,630 and £4,680, respectively.
The report highlights that 2011 saw minimal pressure on headline rents in all of the covered UK markets - with the exception of London where rents rose slightly. Therefore, where occupancy costs fell, this was largely attributable to improved space use. Birmingham witnessed the greatest year-on-year fall in utilisation space standard, which explains its sharp fall in total occupancy costs. Similarly, London City witnessed a 7.3% decrease in occupancy costs to £8,720, driven largely by corporate occupiers consolidating their available workspace.
Karine Woodford, Head of Occupier Research at DTZ, said: "After a year of relative respite, cost-cutting has returned in a big way with occupiers awaiting developments in the eurozone and looking to reduce space per employee. Consolidation has been a theme across the country particularly within the banking and insurance sectors.
They are increasingly seeking occupational densities of one person per eight square metres, down from 10 square metres seen previously." Next five years Looking ahead, UK occupancy costs are expected to grow by an average of 1.8% over the next five years, reaching £6,356 per annum per workstation. However, this will be just below UK average inflation of 1.9%, indicating no increase in average real occupancy costs. The increases will be driven by upward pressure on both rent and outgoings.
The only UK business districts that will see occupancy costs increase above the average are London West End at 3.3% to £17,110, and London City at 3.6% to £10,400. These above-average increases will be driven by anticipated rent increases of 4.0% and 4.4% respectively.
As markets slowly recover, UK occupancy costs over the next five years are expected to experience muted average growth of 1.8%. London City will be the fastest growing market over this period. The large increases in London distort the national picture, as all other UK business districts will see below-average costs increases - ranging from 1.2% in Glasgow and Bristol to 1.6% in Newcastle. Manchester is set to increase by 1.3%, Cardiff, Birmingham and Edinburgh are all in line for 1.4% increases while Leeds will witness 1.5% increases. DTZ Research base case forecasts to 2016 are for positive growth in occupancy costs across the majority of office markets in the US, Asia Pacific and Europe.
However, the report also as looks at effect of a downside economic scenario on global office markets. The downside scenario assumes a double-dip recession in Europe resulting from a break-up of the euro-zone whereby five countries leave the monetary union.
Karine Woodford concludes: "Under the downside euro-zone break up scenario, there are significant decreases in rents and capital values across both the eurozone and Asia Pacific. London West End costs show a decline in the short term but rebound by 2016 compared to the base case, offering occupiers only a short window of opportunity for lease re-negotiation."