Running out of space 12th May 2015

Vacancy rates across the South East office market are at their lowest since 2001, driving rental growth to hit record highs in towns across the region, Knight Frank reported at its annual M25 breakfast presentation this morning as it outlined why the key market is perfectly poised.

Speaking at the annual market bellwether at the Dorchester, KF said the M25 vacancy rate stood at 5.9% in Q1 2015. This falls to 4.2% when only new and Grade A space is analysed, low by London, UK and global standards.

Availability fell by 13% compared to a year ago, across all grades of stock, moving the market back towards the landlord’s favour, KF said.

KF also said that following the re-election of a Conservative led Government and the financial market rally, economic performance inthe region is improving and there is an expectation of a further boost to demand.

Emma Goodford, head of national offices leasing team, Knight Frank, said that while the occupier market had "paused for breath" in 2014 rental growth had continued across all markets and take-up in the first quarter of 2015 moved 2% ahead of the 10-year average to chalk up 650,636 sq ft.

Goodford added that her confidence was a product of 7m sq ft of active named demand, 30% up on this time last year.

Goodford added that there were three reasons why the South East market was well placed - a lack of choice, businesses growing and putting where their staff are housed at the top of their priorities, and "you, the landlord, taking a robust stance on rent".

On the subject of the much lamented lack of big deals in the region Goodford said KF expected 10 deals of 50,000 sq ft or above in the year up slightly on the eight seen last year. Goodford also said those prepared to "be brave and build out of town" could benefit from how well demand for out of town office space has stood up.

Strong investor demand and a lack of deliverable product is holding back stock volumes in the investment market, where KF said it is seeing a hardening of yields across the spectrum, with investors increasingly factoring in likely rental growth during hold periods.

Prime yields now stand at 5% NIY with the combination of weight of money and lack of product expected to drive yields down further moving forward in 2015.  

Tim Smither, head of South East investment, Knight Frank, said that for the first time in this cycle yields in prime regional centres had dipped beneath the South East, another compelling reason to expect further tightening.

Smither added that the acquisitions story was being dominated by the UK institutions.

"This could be a good time to exit if you are not a long-term holder of real estate."

Emma Goodford, head of national offices leasing team, Knight Frank, said: “2015 has started positively supporting our view that take up in the M25 will be almost 30% ahead of 2014, and above the ten year average.  Vacancy levels are heading towards crunch point in combination the market seeing rental growth across a growing number of key centres.  In some cases rents are now at an all-time high- motivation for occupiers to identify and secure the best space now. The election has removed uncertainty and will drive demand.”

Tim Smither, head of South East investment, Knight Frank said: “The investment market continues to strengthen, with prime yields standing at 5% NIY. We expect this yield compression to continue for the rest of the year, driven by a combination of a lack of stock, significant levels of equity looking to be deployed and anticipated rental growth in most core markets.”