TMT office space 31st March 2014

Central London office take-up and vacancy rates have returned to pre-recession levels, with the tech and creative, professional and insurance sectors underpinning the resurgence, according to a report by DTZ.

The report - “Central London Five Years On” - shows that average take-up levels are now around 12m sq ft per annum, as high a figure only reached once (in 2010) since the UK economy moved into recession in the third quarter of 2008. Even more strikingly, vacancy rates have also returned to pre-recession levels with the availability ratio falling to 5.4% last year compared to 5.9% in Q1 2008.

During the crisis, the banking sector was the worst hit, as expected. In 2011 and 2012 banks took around 80% less square footage than anticipated by annual averages. Offices were sub-let and searches put on hold and in current market conditions, banks are still more likely to be subleasing space than expanding. However, contraction in the banking sector has been mitigated by the growth in tech, creative, insurance and professional firms.

According to recent research, tech and creative sector firms snapped up 3.8m square feet of office space in Central London last year and accounted for the largest proportion take-up (36 per cent) followed by companies in the professional sector (24%). Insurance sector firms – on whom recent economic cycles have had less impact than on the banking sector – bucked downward trends in 2009 and 2012, when take-up by such businesses was 6% and 34% (respectively) up on the pre-recession average. Such firms are now responsible for paying some of the highest rents achieved in Central London post-2008. Changes in sectoral demand have been reflected geographically. Many tech and creative firms have opted for fringe locations like King’s Cross and the South Bank, with take-up in the south-eastern fringe 10% up on the 15 year average and take-up in the north-western fringe 88% up on the 15 year average. Activity by insurance firms means EC3 – the traditional home of the insurance sector - is also prospering, with new developments there changing London’s skyline.

Richard Howard, DTZ’s Head of Central London Agency, said: “The post crisis years saw tenants from the tech and creative sector become just as significant as those from the financial, legal and professional and insurance sectors. “Average annual take-up by companies in this sector fell by just 1.8% post-recession (when compared to pre-recession), amounting to no less than 1.7m sq ft in each of 2010, 2011 and 2012.” Another key element of London’s resilience during the recession, according to the report has been the sustained interest from overseas investors. International appetite for London’s commercial property has never been stronger. In 2013, non-domestic investors came from 37 countries and accounted for 65% of the transaction volume.

This included the top two deals of the year; the sale of the More London, SE1 office portfolio to the Kuwaiti government’s St Martin’s Property Corporation for £1.7bn, and the exchange of Blackstone’s 50% share in Broadgate to the Government of Singapore Investment Corporation for a similar price. The importance of foreign investment was underlined by two recent significant announcements; a £700m investment by Dalian Wanda Group into a five star hotel development in the Battersea Nine Elms area, and a £1bn investment by the Chinese entity ABP into East London’s Royal Albert Docks (the Royal Albert Docks development alone is set to create an estimated 20,000 jobs and be worth £6bn to the UK economy when complete).

Alistair Brown, Head of City Agency at DTZ added: “Five years on from the crash, corporate profits are up, borrowings are down and official figures for the last three months of 2013 show businesses are investing again. The capital is in a strong position both domestically and globally, and landlords have an ever-evolving tenant base from which to benefit. “Changes to London’s occupier base post-2008 mean it has become increasingly important to foresee trends in the global and domestic economy, and to understand the businesses that make up central London’s tenant base both now, and those that will become important in the future.”