South east office news 8th June 2016

The pattern of activity and pricing in the office markets of the South East is undergoing a period of significant change with a number of new locations set to emerge and expand, reports JLL in a wide-ranging report on the new growth centres of the key office market and the drivers behind it, revealed exclusively by CoStar News.

Focusing on the opportunities JLL writes: “The emerging markets of the South East will present different challenges to developers and investors. In the more established markets, refurbishment/repositioning or strategic land acquisition may present the greatest opportunities.

“Whereas, in the more emergent locations, looking to benefit from first mover advantage and being prepared to develop speculatively in central locations may be the most successful strategy.”

JLL writes that for much of the last 20 years historic market performance within the Western Corridor has been similar across the region.

Average West London prime rents have consistently been above those in the Thames Valley, but the timing and duration of market cycles has been nearly identical with the premium for West London locations consistent.

But JLL writes that in recent times there has been a notable divergence in performance.

JLL writes: “Prime rents in West London have risen by 45% since the end of the rental downturn in 2009, whereas Thames Valley rents have only grown by 22%.”

That rental growth had been driven by the locations closest to central London – Hammersmith and Chiswick – a result of decentralisation driven from central London but also the number of “high quality new developments which have triggered rental uplift”.

Across the Thames Valley, JLL reports growth has been steady and largely concentrated on the key towns across the region with Reading in particular seeing healthy occupier demand and strong take-up, well ahead of the level of activity in other towns.

With this in mind JLL writes that the outlook for the Western Corridor is strong on the back of sustained economic expansion but the pattern of growth will not be even across all locations, with the fastest growing locations those with a “deep pool of skilled labour, transport linkages, and dynamic business clusters with exposure to fast-growing industries”.

JLL focuses its predictions on two areas – the “established growth leaders” Hammersmith, Chiswick and Reading and the “emerging growth centres”.

For emerging growth centres it predicts an acute shortage of offices in central London will spur expansion in a range of Greater London markets including White City, Old Oak Common and Croydon.

Outside London, rapid economic growth is spurred by the organic clustering of businesses will continue to propel strong office performance in areas including Cambridge and Brighton

“Occupiers will continue to look to these and other locations that offer specialised pools of skilled labour within attractive lifestyle destinations. Investors may look to secure good quality, well located space or be prepared to develop on a speculative basis to get ahead of the curve.”

JLL posits that Oxford, while lagging Cambridge at present in terms of strong office market performance, shares many similarities and is obvious candidate as a key growth city.

Milton Keynes is also highlighted as primed for strong growth.

JLL writes: “In line with employment land, office stock is abundant across the town. However, there has been strong demand for good quality space in the town centre over the past year and this has increased the pressure on rents, especially for prime space, where supply is scarce. Santander, one of Milton Keynes largest employers, leased 70,000 sq ft in Q3 2015, one of the largest deals over the past few years.”

Croydon is picked as strong future performer thanks to the significant renaissance it is undergoing “led by a substantial residential development with strong additional office and retail components” while White City and Old Oak Common are picked for their central positioning within one of the capital’s key opportunity area regeneration projects.

The changing dynamics of the Western Corridor office market are the product of a number of socio-economic drivers JLL writes.

These are:

  • Accessibility of skilled employees - Employee retention is the key driver of current requirements and bargaining power in the labour market is shifting to employees. Employers are typically looking for young, skilled workers, and JLL outlines where there is the strongest concentration of these potential employees in the South East.
  • A clear advantage for the university cities – The cities of Cambridge, Brighton, Reading and
  • Oxford undoubtedly stand out as possessing the highest proportion of students. Cambridge, Brighton,
  • Reading and Oxford have strong concentrations of young people in addition to their student base, indicating that despite the ‘pull’ of London, they are retaining skilled graduates post-graduation.
  • Urbanisation - There is a strong and sustained global trend towards a higher proportion of the population living in cities and within the Western Corridor, West London has been a clear beneficiary.
  • Clustering - Cambridge clearly benefits from having one of the world’s best universities within the city, just as Reading possesses a comparative advantage due to its IT cluster.
  • Universities and collaboration - Strong links between the business community and universities can clearly be mutually beneficial.

 

The other crucial element in driving growth is infrastructure and transport improvements.

JLL expects the impact of the Elizabeth Line to draw activity toward the line, benefitting the locations along the route, such as Reading, Maidenhead, Slough and Ealing.

The agent writes: “The Elizabeth Line will also improve connectivity with the West End and City markets, and as a result, we expect the locations directly impacted to become increasingly attractive to central London occupiers looking to reduce their occupancy costs.

Looking further ahead, Crossrail 2 will run from Tottenham Hale and New Southgate in north London to Wimbledon and surrounds in south west London.”

JLL also expects significant momentum in markets close to either Heathrow or Gatwick should either be endorsed for a third runway while Network Rail’s proposed Western Rail Link to Heathrow will “increase the attractiveness of locations to the west of Heathrown, such as Slough, Maidenhead and Reading.

James Finnis, Head of South East Office Agency at JLL, said: “The metrics behind these growth locations reflect the clear messages we are hearing from occupiers; they want to be in environments where their business can grow, where they can employ the best people to make their business flourish. They need a wider business ecosystem built on transportation infrastructure, accessing a wide talent pool including the key Millennial group, retail and leisure amenities and like minded neighbours in either the same or complimentary sectors.

"Many of the centres we have identified are in towns and cities with leading Universities and Colleges- this is no coincidence. Many of the centres have a limited supply of stock and with a growing critical mass leading to more demand we are already seeing rental growth which is forecast to increase.”