London's Office Rental Market: 2017 Overview

According to recent research data, 2017 is expected to be a good year for the London office rental market, despite the much-disputed effects of the EU referendum and other political developments in Europe and the US. The key main trends to note involve a diversification of the occupier profile, increased demand for flexible terms, and a potentially high number of relocations within the city following the implementation of new business rates.

In 2017, London is expected to witness a widening in the number of alternatives to traditional office space, such as co-working spaces. Flexibility is also evident in lease terms, which may become shorter and include tenant-only break clauses. Certain business sectors are expected to become major players in the occupier market this year. Technology, science, and creative start-ups are now behind important real estate transactions. Lastly, we must anticipate the effects brought by the increase in business rates that will come into effect in April 2017, although not all London office sub-markets will be affected equally.

Key Market Indicators

The London office rental market ended 2016 on a generally positive note, and overall the market is currently characterised by low vacancy rates and a strong appetite coming from overseas investors. Across the city, both absorption and take-up rates are below the decade's average, availability rates for office properties across the city are up, and rental values remain stable.

An area-by-area breakdown is as follows:

- Rental values for West End offices are mostly stable and hit the £120 / sq ft mark in Marylebone, Knightsbridge, and St James'.

- City of London offices evidence decreasing vacancy rates ranging between 3.6 percent (Canary Wharf and the city) and 6 per cent (Holborn and Clerkenwell). Rental values range from £70 in Holborn and the city core to £60 in Aldgate.

- Southbank rental values have undergone important increases of up to 12 per cent, but are still more than 55 per cent lower than those in core markets. Rental values average £81 - £96 / sq ft. A similar trend was observed in the Docklands, where it is still possible to find office units priced at £40 / sq ft. These two areas are now an attractive destination for occupiers looking to relocate within London.

- Midtown office values range between £97 and £113 / sq ft, although availability remains limited.

- In Canary Wharf the market remains rather static due to a balanced supply-demand relationship. Rental values range between £69 - £79 / sq ft.

2017 Market Outlook

Overall, the London rental office market is expected to become favourable to tenants and investors over the next 12 months.

There are mixed predictions with regards to the future performance of rental values. For instance, analysts at Carter Jones predict an increase that may last until the end of Q2 2017, most notably in core sub-markets like the West End, Southbank and City Fringe, where rental growth levels are expected to experience an 8 per cent surge. However, the delivery of new developments during the second half of 2017 and the subsequent increase in supply may bring rates down later in the year. Others are less optimistic and expect rental growth to decline between 6 and 10 per cent, mainly in West End, Victoria, the Docklands, and the City, since these areas have a large amount of office properties that have been vacant for a while (4).

Also in the forecast is the emergence of West London as a solid business district thanks to the redevelopment of White City, which may overtake established office locations like Hammersmith.

Equally important is the upcoming revaluation of business rates, whose sharp increase could exceed 50 per cent. Office properties in Spitalfields and Clerkenwell are the most likely to be hit by rate increases of 98 per cent, and other areas significantly affected are Kings' Cross, the City, and South Bank. This may prompt a surge in relocation activity and subsequent increases in demand for office properties in secondary / fringe markets.

During 2017, we will see a consolidation of demand for shared office space that suits easy-in easy-out requirements. Demand for co-working and shared office arrangements will grow significantly in Aldwych, Southwark, and Tower Hill.

With regards to the occupier profile, the technology sector has shown its commitment to making of London their office base, and large multinationals like Apple, Facebook, and Google have already announced that they will expand their London-based office workforce. Last but not least, we should be aware of the increasing demand coming from creative and tech-related startups, and from other sectors that are expected to emerge into key London office occupiers, namely robotics, artificial intelligence, FinTech, and R&D.

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Sources:

(1) http://www.carterjonas.co.uk/~/media/Publications/London%20Office%20Market%20Update%20Q1%202017v3.ashx
(2) http://www.colliers.com/-/media/files/emea/uk/research/offices/17001-londonofficessnapshot-january2017-v8web.pdf?la=en-GB
(3) http://www.carterjonas.co.uk/news-and-events/news-and-press-releases/June-15/cost-analysis.aspx
(4) http://blogs.wsj.com/moneybeat/2016/11/01/wsj-citys-brexit-briefing-london-office-rents-to-slide-weak-pound-boost-manufacturing/
(5) http://www.costar.co.uk/en/assets/news/2016/October/The-2017-Business-Rates-Revaluation---Which-Areas-Of-London-Will-Be-Hardest-Hit/
(6) https://hubblehq.com/blog/2017-the-future-in-office-trends
(7) http://uk.businessinsider.com/google-to-open-new-uk-hq-with-3000-jobs-2016-11
(8) http://www.telegraph.co.uk/finance/newsbysector/constructionandproperty/11860126/Facebook-finds-new-home-for-London-HQ.html
(9) http://www.standard.co.uk/news/london/revealed-apple-to-create-stunning-new-hq-at-battersea-power-station-a3356201.html
(10) http://www.knightfrank.com/globalcities/2017/london-office-demand