The availability of office space in London’s Midtown market continues to decrease with availability now at a record low and set to drop further. There is just over 1m sq ft on the Midtown market which means that only 2.3% of total stock is available.
The most acute shortage is being felt in the Grade A space category – only 31% of the currently available space is new or refurbished. Occupier demand for secondhand accommodation remains muted but the appetite for new space remains strong. This year has seen work start on more than 1m sq ft of development, but these projects will not come on stream until 2020 at the earliest. The limited choice of good and new space has sent take-up tumbling. In the first quarter of the year, 377,630 sq ft was leased – the lowest quarterly level for 17 years.
Farebrother Leasing & Development Partner, Jules Hind, commented: “What we’re seeing is an unprecedented set of circumstances. Availability is at a record low and development has not yet caught up with the demand for new space. It’s a situation which will bring some upward pressure on rents and a reduction in leasing incentives, but it would be wrong to try and force these prematurely as continued political and economic uncertainty means that it’s still a very sensitive market. We’re currently advising several medium sized professional services firms on more than 250,000 sq ft of office requirements and it would be a substantial backwards step for the market if this type of demand was deterred by landlords getting too aggressive with rental/incentive packages.”
Consolidation among the professional services firms which account for large amount of Midtown office occupancy is likely to further fuel the demand for new space as merged businesses seek new homes.
Jules Hind comments: “In a tough business environment, a growing number of lawyers and accountants are considering mergers and this will mean they need the scale and quality of space to meet the requirements of their new enterprises. A third of the 1.7m sq ft of space currently under construction is already prelet so the development pipeline is going to need to expand substantially to even keep pace with current demand. However, we‘re seeing sustained rental levels that are making the development risk-reward equation of attractive.”
The Midtown investment market is facing a similar shortage of supply. After an exceptional 2018 which saw £4.9bn of Midtown assets traded, investment volumes in Q1 were just under £607m – 14% down on the previous quarter and below the 10-year quarterly average of £731m.
Farebrother Head of Investment, Alastair Hilton, commented: “Investment turnover will continue to drop further this year. There’s strong demand for assets but little or no stock on the market. There are virtually no forced sellers and most investors holding assets do not see where they could recycle capital to get equivalent returns or the prospect of further value growth.”
Midtown’s identity continues to change as it becomes home to a wider diversity of occupiers. This is most clearly reflected in the provision of places to shop, eat and drink.
Retail Partner, Neil Davies, comments: We’re seeing a much more textured landscape in terms of amenities. A good example is the Cursitor Street Food Market which has become an immediate success and is bringing more animation to the Midtown streetscene. If you work in Midtown you’re seeing a much more diverse and interesting range of places to go and things to do.”