Overview Occupiers continue to face the challenge of finding suitable space across central London, with supply levels heading to historical low points and take-up volumes remaining strong. Occupier focus remains on upgrading offices as part of a strategy to maximise efficiency and as a tool to attract and retain the best talent; choice however remains constrained as a result of the lack of supply and rising rents. Occupiers are increasingly widening their search area across the capital and migration trends have continued apace in the first half of 2015. The squeeze on supply is expected to continue in the short term, before starting to see an uplift in 2016, with only 757,000 sq ft due to compete in the remainder of the year. Increasing numbers of companies will be forced to look at alternative locations and we anticipate relocation trends to continue while supply remains constrained. This report provides a detailed analysis of relocation patterns with a focus on trends in various sectors. A total of 293 known leasing transactions in excess of 5,000 sq ft, excluding serviced office providers and educational & medical occupiers, was analysed. Of these, 171 lettings were for property located in the City, 17 in East London (Canary Wharf, Docklands, and Stratford), and the remaining 105 were West End transactions. Occupier expansion & relocation trends in central London Net absorption: strong leasing activity accompanied by positive expansion trends Central London occupiers continued to expand and take increasing volumes of space in H1 2015. Companies already based in central London relocated from a total of 3.4 million sq ft, committing to 5.3 million sq ft, which equates to 56% growth in floorspace occupied. This compares to a 42% increase in 2014. In addition, there was around 1 million sq ft of floorspace leased to serviced office operators and companies new to central London. During the first half of the year, there has been increasing numbers of occupiers taking overflow space in either their existing office building or close by rather than instigate a full scale relocation. This is a more cost-effective response to growth, providing a solution to existing lease commitments and flexibility in the company s real estate holdings. Occupiers are increasingly widening their search area across the capital London companies increased from 3.4m sq ft to 5.3m sq ft, 56% growth in floorspace occupied Expansion in the floorspace occupiers intend to move into was evident across all business sectors, as economic confidence and employment growth have a positive impact on business prospects. In particular, the banking and financial services sector saw expansion in the floorspace they will occupy, indicative of the improvement in business seen across the sector - albeit financial services companies are driving the growth as banks, particularly investment, continue to restructure. Banking & financial services accounted for around a third of the expansion in net floorspace, up from 27% in 2014, followed by media & tech companies. 1
Growth from the media & tech sector shows no sign of slowing compared to previous years, with the actual increase in occupied floorspace almost doubling. This was driven by companies such as Google, Facebook and Expedia expanding their office footprint in the capital. Relocation patterns: west to east migration accelerating Excluding new companies, serviced office operators, and medical & educational companies, 48% of occupiers, leasing more than 5,000 sq ft, moved some or all of their operations out of their existing submarket in the first half of 2015. Analysing companies leasing more than 10,000 sq ft or above indicated that the proportion of occupiers who relocated was marginally lower year on year, 44% in H1 2015 compared to 50% during the corresponding period last year. Nevertheless, the shift from west to east continued to be a key trend, with just under half of West End occupiers (48%) migrating to one of the City & East London submarkets, primarily due to rising rents and a shortage of supply in the West End. In absolute numbers, there were 29 migrations from West End submarkets to City submarkets, while two West End based companies migrated further to East London. Migrations from the City were fewer in number and split more evenly between west and east, with only eight relocations to the West End and seven to East London. Relocation to the east provides occupiers with the opportunity not only to upgrade their offices but in general to reduce their operating expenses, with both rents and rates well below those paid in the west. While most relocations were towards the City Core, there were signs that West End occupiers were also embracing alternative submarkets. TfL prelet 270,000 sq ft at TIQ, Stratford as part of their strategy to consolidate their current offices mainly based in Victoria, while DLKW Lowe moved from Kensington to C Space in Shoreditch. ACCA and McMillan Cancer Trust were among the occupiers who moved from the City to the West End; the former migrated a short distance from Midtown to the recently completed Adelphi and the latter from Southbank to Millbank Tower in Victoria. The FCA was the only relocation that originated from East London but they remained loyal to the area, preleasing 425,000 sq ft at TIQ, Stratford where they will relocate from Canary Wharf. 48% of West End occupiers migrating to one of the City & East London submarkets 2
Submarket analysis The submarket breakdown showed that the City Core saw the greatest number of inmovers, with 27 transactions. This dominance is of no surprise, given that the submarket has the highest concentration of office space in central London. The majority of inmovers migrated from Midtown and Mayfair & St James s, while out-movers, which numbered 17, mainly remained in proximity of the City Core, moving into the neighbouring Outer Core. In line with previous year, Mayfair & St James s, followed by Soho & Covent Garden, had high numbers of out-movers in the West End, triggered mainly by low vacancy rates and increasing prime rents. At 8.7%, Mayfair & St James s recorded the strongest rental growth in central London in the first half of 2015, while available space dropped by 8.9% over the same period to reach 717,000 sq ft. Soho & Covent Garden experienced a sharper fall in supply with the vacancy rate contracting by just over a third to stand at 2.5% by June 2015. On a positive note, both Mayfair & St James s and Soho & Covent Garden displayed the highest degree of loyalty of the West End submarkets, with approximately 40% of all leasing transactions in both submarkets originating from companies already located in the area (figure 2). At 8.7%, Mayfair & St James s recorded the strongest rental growth in central London in the first half of 2015 Analysis at submarket levels showed a significant variation in the fortunes of the core City submarkets and the core West End office markets in terms of net migration numbers (figure 3). This is a continuation of the trends seen in 2014. 3
12 10 8 6 4 2 0 Figure 3 Submarkets with positive net position: in-movers minus out-movers A focus on sectors Banking & finance: resurgence in activity most evident in traditional clusters The banking & financial sector recently saw a resurgence in business activity, which was reflected in leasing volumes during the first half of 2015. Total H1 lettings from the sector was 20% ahead of the corresponding period last year and the key beneficiaries of this upturn were the traditional finance clusters of the City Core, Canary Wharf, and Mayfair & St James s, in terms of both number and volume of transactions. Relocation trends within the sector continued to highlight that banking & financial occupiers tend to remain loyal to their traditional clusters, with only 34% migrating to new areas (figure 4) and those migrating moved to the City Core followed by Canary Wharf and Mayfair & St James s. The City Core saw the highest number of companies move out of the area primarily to Canary Wharf, while Mayfair & St James s attracted the highest number of new entities and companies new to central London. These were all small boutique advisory firms, with the most notable being PJT Partners, leasing 29,000 sq ft at 1 Curzon Street. Total H1 lettings from the banking & finance sector is 20% ahead of the corresponding period last year 4
Legal sector: strong financial year and M & A activity accelerating Legal merger and consolidation activity accelerated in recent years and is anticipated to continue apace as several firms plan for international expansion to tap into new markets. With the growing competitive pressure, many small practices may exit the market while leading firms will continue to expand and take further space. There was already evidence of this filtering to the office leasing market, with Pennington Manches, who merged in 2013, leasing c.40,000 sq ft at 125 Wood Street. The merger of Charles Russell and Speechly Bircham in late 2014 also resulted in the firm taking additional space at 10 Fleet Place this year. Expansion was also reflected in the net take-up figures across the wider sector. During the first half of 2015, central London law firms relocated from a total of 314,000 sq ft and committed to 401,000 sq ft, equating to an expansion rate of +28%. This compares to +26% and +15% during the corresponding periods in 2014 and 2013 respectively. Law firms, however, tended to be tied to their existing locations, with two thirds remaining in their existing submarket (figure 4). Our analysis of relocation patterns showed that the majority of legal migrations occurred between the City Core, the Outer Core, and Midtown. During the first half of 2015, central London law firms relocated from a total of 314,000 sq ft and committed to 401,000 sq ft, equating to an expansion rate of +28% 5
Media & tech: relocations to core areas increase as sector matures Mid-year leasing volumes by the sector was 8% ahead of H1 2014, with strong signs that occupiers continued to expand and take increasing volumes of space. This was reflected in a strong expansion rate from existing media & tech occupiers, indicating a maturing in the sector and the significant business growth being experienced across a wide range of media & tech companies, as London remains the European powerhouse of the sector. Central London existing occupiers relocated from approximately 600,000 sq ft and leased 1.2 million sq ft during H1 2015. The sector also continued to see the highest number of companies new to the central London market, such as Forward 3D Ltd taking space at 100 Leman Street, Appnexus who were previously in serviced offices and recently moved to Princess House, 50-60 Eastcastle Street, and Natural Motion who relocated their London office to 6 Agar Street. Media & tech occupiers were the most footloose sector this year and 48% of occupiers moved submarket Media & tech occupiers were the most footloose sector this year and 48% of occupiers moved submarket (figure 4). There was an increasing acceptance of core markets from within the sector and the City Core, followed by the Outer Core, saw the highest number of media & tech companies relocating there from other submarkets. The sector was also the main driving force in the west to east migration. Soho & Covent Garden, followed by Clerkenwell & Shoreditch, had the highest number of out-movers as a lack of supply in more traditional media & tech locations hinders expansion activity. The majority of Clerkenwell & Shoreditch out-movers this year were well established companies who were priced out of the area as a result of rising rents and a lack of choice. Following patterns seen in previous years, edge of the City schemes have benefited from this migration as these companies keep in as close proximity to their previous locations to preserve the appeal to workers. This included companies such as Maxus and We Are Social who both relocated from their previous locations in Shoreditch to Alphabeta, on the edge of the City. Vacancy rates fell further in the area in the last six months and there are currently no buildings in Shoreditch which can accommodate large requirements particularly in excess of 50,000 sq ft, without committing to a prelet. Significant development completions are expected in 2016, following which the leasing market is likely to attract new entrants from other restricted submarkets and to retain existing expanding companies. But in the near term, falling vacancy rates and a shortage of quality space will act as a brake on activity in the emerging City areas. While a wide range of smaller companies will continue to be drawn to these areas, more established firms are increasingly likely to consider submarkets such as the City Core, which may be bolstered by the relocation of Bloomberg to its new headquarter in the heart of the City. Falling vacancy rates and a shortage of quality space will act as a brake on activity in the emerging City areas 6
Professional services: expanding and upgrading offices The professional services sector saw a considerable uplift in leasing activity this year with H1 volumes standing 35% above the same period in 2014. The largest transaction was Deloitte s preleasing of c.266,000 sq ft at 1 New Street Square, where they will consolidate their offices. The sector is anticipated to be one of the strongest source of employment growth over the medium term which should trigger some expansion, albeit moves are still typically prompted by a lease event. There was some evidence of this growth in a positive net take-up rate of 44%. This was a turnaround from 2014, when the sector showed a negative absorption rate. Around 40% of occupiers moved all or part of their offices out of their existing submarket With the exception of a few subsectors such as management consultants, who are traditionally West End based, the majority of professional services occupiers are cost sensitive and are willing to relocate to keep occupancy costs contained. Around 40% of occupiers moved all or part of their offices out of their existing submarket (figure 4). They migrated mainly from Midtown and North of Oxford Street submarkets to the City Core and Southbank. The West End did however benefit from new entrants into the capital with companies moving into central London from western suburbs and beyond. Public & government: setting foundations for E20 Occupational activity by the public & government sector accounted for 20% of total H1 volumes in central London, mainly resulted from two major transactions by the FCA and TfL in Stratford. TfL will be a new entrant to East London, but the FCA will be migrating from Canary Wharf, where it is housed in space occupied by its predecessor, the FSA. In the last two years, public & government occupiers showed a propensity to relocate as their costs are increasingly under scrutiny. During the first half of 2015, 40% of occupiers relocated to a new area, compared with 28% remaining in their existing location. Not only has the sector relocated to lower cost areas, occupiers particularly from the charitable sector, have taken the opportunity to reduce the space they occupy and this was reflected in an increase in net take-up of just 20%. The majority of footloose occupiers migrated from various areas of the West End and Midtown to morecost effective destinations of the City and East London. The sector is anticipated to remain one of the most willing to relocate to emergent areas of London. During the first half of 2015, 40% of Public & Government occupiers relocated to a new area, compared with 28% remaining in their existing location 7
Summary & outlook Central London occupiers continued to show willingness to relocate to new areas. During the first six months of the year, just below half of all occupiers moved all or part of their operation out of their existing submarkets, which is a slightly lower rate compared to previous years. However, expansion continued to rise, although we are seeing a trend to take overflow space rather than full scale relocations. With increasing interest from overseas firms to enter the London market, expectations are that absorption rates will continue to trend upwards. The key driver for occupiers migrations is the dearth of quality supply evident across much of the market. In the West End particularly, a more severe shortage of quality space is evident with Grade A availability falling by 30% from 2.7 million sq ft in early 2014 to 1.9 million sq ft at the end of Q2 2015. Cushman & Wakefield estimate that current Grade A supply is equivalent to just over one year s supply based on average three-year take-up. Although development completions are expected to increase, occupiers choice will remain constrained in the short term and this will drive further occupier migrations to new areas. Media & tech, professional services, and public & government occupiers are likely to be most footloose and willing to embrace new areas. Grade A availability has fallen by 30% from 2.7m sq ft in early 2014 to 1.9m sq ft at the end of Q2 2015 Figure 5 illustrates current vacancy rates which, combined with projected completion levels, provides an understanding of central London supply by submarket in the coming years. The City Core, followed by Victoria, will see the highest total volume of delivery between now and 2017. Clerkenwell & Shoreditch, together with Mayfair & St James s, are also anticipated to experience a spike in speculative delivery next year. 8
Given the level of speculative space in the pipeline for 2016 across most areas, our expectations are that emergent areas of the City together with the more mature markets of the City Core and Victoria will benefit from footloose occupiers in the near term. Nevertheless, the lack of immediately available supply in many of the emergent areas is anticipated to be reflected in strong rental growth outperforming core markets in the medium term. Across East London, Stratford is expected to see a boost in office supply this year following the completion of Here East and will provide suitable options to occupiers seeking alternative cost-effective locations to satisfy their real estate strategies. Stratford is expected to see a boost in office supply this year following the completion of Here East This report has been produced by Cushman & Wakefield LLP (C&W) for use by those with an interest in commercial property solely for information purposes and should not be relied upon as a basis for entering into transactions without seeking specific, qualified professional advice. It is not intended to be a complete description of the markets or developments to which it refers. This report uses information obtained from public sources which C&W has rigorously checked and believes to be reliable, but C&W has not verified such information and cannot guarantee that it is accurate or complete. No warranty or representation, express or implied, is made as to the accuracy or completeness of any of the information contained in this report and C&W shall not be liable to any reader of this report or any third party in any way whatsoever. All expressions of opinion are subject to change. The prior written consent of C&W is required before this report or any information contained in it can be reproduced in whole or in part, and any such reproduction should be credited to C&W. Should you not wish to receive information from C&W or any related company please email unsubscribe@cushwake.com with your details in the body of your email as they appear on this communication and head it "Unsubscribe". 2015 Cushman & Wakefield LLP. All rights reserved. For emailed reports as opposed to hard-copies Contacts: Azar Laghaei London Markets Research Analyst (Report Author) azar.laghaei@cushwake.com Elaine Rossall Partner, Head of London Markets Research elaine.rossall@cushwake.com www.cushmanandwakefield.com