As we move into 2019, the Cushman & Wakefield Insight team outlines its predictions for the London office market over the next 12 months.
By Patrick Scanlon, Head of UK Offices Insight
1. Pre-letting will reach new heights
The effects of the EU referendum on the London market over the last two years have been surprisingly weak, with office take-up outperforming expectations. In 2019, the lack of speculative space in the development pipeline will continue to drive demand for large pre-lets. Pre-lets accounted for an average of 28% of take-up in Central London in the six years to 2018 compared to just 16% in the five years to 2012 and occupiers seeking large, quality units will not be able to rely on the speculative pipeline providing adequate options. During 2019 occupiers will look to secure space further in advance of their lease events; this means that occupiers may be looking to secure options for delivery in 2023 and beyond. Read our London Pre-Let report
2. Tech and professional sectors will dominate
The technology and professional sectors will be the ones to watch in 2019. Although the FAANG companies have made their large headquarters acquisitions over the last few years, the sector will continue to expand; forecasts suggest that 6,000 additional positions will be created in London in the sector over the course of 2019. Much of this will be through M&A; such moves could have major implications for London real estate. In addition, Amazon, Google and Microsoft are all expected to start making major acquisitions to expand into the Artificial Intelligence arena. However, the amount of value wiped from the share price of some of the sector’s major players in 2018 due to concerns over valuations and projected sales growth suggests that demand may be more subdued than we saw in 2018.
The professional services sector has traditionally been fast-growing, and this is likely to continue in 2019 as Brexit-related demand for solicitors, accountants and management consultants strengthens. The government itself has spent almost £15 million on external consultancy services since the EU referendum; the financial sector is likely to also pay handsomely for advice. Data suggests that 20% of all Brexit specialists in the UK consulting market are focusing on the public sector, while 73% are focusing on the financial sector. This increase in demand will prompt headcount growth – forecasts suggest 13,000 new positions will be created in the professional services sector in London in 2019.
Demand from the financial services sector is likely to weaken further in 2019. The sector’s share of London’s real estate market has been trending downwards since the global financial crisis, and the disruption caused by Brexit is likely to further drive down leasing activity.
3. Continuing strong demand for flexible workspace
Take-up by flexible working providers fell back in 2018 to around 2.0 m sq ft, which was unsurprising given the remarkable level of activity seen in 2017, a record year during which 2.5 m sq ft of space was acquired. The final quarter of 2018 saw a surge of activity with more than 700,000 sq ft of space let to providers, which will set the tone as we move into 2019. Demand from providers will remain healthy in 2019 as consolidation in the sector creates an increasingly global platform, which will encourage large businesses to incorporate flexible solutions across geographies.
2019 will witness an unprecedented proportion of space in new developments given over to flexible workspace, an increasing amount of which will be managed by the landlord either directly or by proxy. Take-up volumes may struggle to keep pace with demand though, simply given the relative lack of built space on the market and the reluctance of landlords to pre-let off-plan to flexible workspace providers.
4. The vacancy rate will remain below the 10-year average
The Central London vacancy rate will rise to around 5.5%, although this remains below the 10-year average and is comparable to mid-2017 levels. Unlike other cycles where a rising vacancy rate has been a sign of market distress, 2019 will see space come to the market which has been vacated by tenants moving into new space acquired over the last 2-3 years. This will create opportunities for occupiers considering non-prime options, although it will also increase the price gap between prime and secondary space as availability of the former continues to fall.
Debt availability for speculative development remains low compared to pre-GFC levels, which will place further pressure on the pipeline in the coming 12 months. More than half of all development space due for completion in 2019 is committed or under offer leaving around 3.6 m sq ft, which represents less than eight months’ worth of stock assuming average levels of take-up.
5. Investor demand for London real estate will remain strong
Despite Brexit headwinds, the strong fundamentals of the London commercial real estate investment market will continue to attract investment from across the globe. However, investor caution will be the theme of the first quarter at least, with a potential softening in sentiment presenting opportunities for a wider range of investors to enter the market.
As the trade war between China and the US continues, wealth preservation comes increasingly to the fore, with overseas purchasers taking a long-term view when selecting geographies in which to invest. London currently represents good value given the weak pound, and should we see further currency devaluation in 2019, demand from private Asia-Pacific investors and US private equity houses will strengthen significantly.