London Office Policy Review 2012 Prepared for: Greater London Authority 1 By RAMIDUS CONSULTING LIMITED Date: September 2012 London Office Policy Review 2012 London Office Policy Review 2012 By Ramidus Consulting Limited with Roger Tym & Partners September 2012 Dedication During the preparation of this report one of the principal authors died very suddenly. David Chippendale had been involved in the LOPR since its inception, and has played a major part in laying sound foundations for what is now seen as the authoritative review of London office policy. David was a leading personality of the property research industry and will be hugely missed by many friends and colleagues. We dedicate LOPR 12 to David’s memory. Acknowledgements Ramidus Consulting Limited was appointed in February 2012 to undertake LOPR 12. The team comprised Rob Harris, David Chippendale, Ian Cundell and Sandra Jones. We have worked very closely with Dave Lawrence and Adala Leeson of Roger Tym & Partners, who have provided invaluable input to the forecasting and policy analysis. Martin Davis of DTZ and Theresa Keogh and Hannah Lakey of EGi have once again provided data, and we thank them for their assistance. Prepared for: Greater London Authority i By RAMIDUS CONSULTING LIMITED Date: September 2012 London Office Policy Review 2012 Contents Page Management summary v 1.0 Supply and demand in Central London 1 1.1 The Central London office market in context 1.2 Market and planning data in Central London 1.3 Central London availability and take-up overview 1.4 Central London take-up and availability by quality 1.5 Office starts in Central London 1.6 Offices under construction in Central London 1.7 Permissions and applications in Central London 1.8 Supply and demand: overview 2.0 Benchmarking the Central London office market 17 2.1 Benchmark 1: Permissions versus starts 2.2 Benchmark 2: Availability versus stock 2.3 Benchmark 3: Pre-lets versus overall starts 2.4 Benchmark 4: A range of rent levels 2.5 Benchmark 5: Years supply of office space 2.6 Benchmarks: overview 3.0 The impact of recent economic events 29 3.1 Recent context to the London economy 3.2 The London economy since 2008 3.3 The impact on the office occupational market 3.4 London’s competitive position 3.5 London’s office investment market 3.6 Structural and cyclical change: the prospects for London 3.7 Recent economic events: overview 4.0 Prospects for non-CAZ office centres 48 4.1 Central and Outer London performance 4.2 Outer London forecasts 4.3 Individual office centres: Inner London, non-CAZ 4.4 Individual office centres: Outer London preamble 4.5 Individual office centres: Outer London assessment 4.6 London compared to the South East and East of England 4.7 Office centres: overview 5.0 Work styles and occupation densities 84 5.1 Organisational demand change 5.2 Flexible work styles 5.3 Density and utilisation 5.4 Terminology in employment densities 5.5 Employment density estimates 5.6 Applied employment densities 5.7 Work styles and densities: overview 6.0 London’s mega schemes 93 6.1 The rise of the office economy 6.2 Historic pattern of mega scheme development 6.3 Second generation mega scheme pipeline Prepared for: Greater London Authority ii By RAMIDUS CONSULTING LIMITED Date: September 2012 London Office Policy Review 2012 6.4 Market supply/demand implications 6.5 Spatial policy implications 6.6 Mega schemes: overview 7.0 Employment and floorspace need forecasts 106 7.1 Forecast approach 7.2 Office forecasts by sector 7.3 Office forecasts by borough 7.4 Sensitivity tests 7.5 Employment and floorspace: overview 8.0 Office to residential conversion 129 8.1 Potential for conversion 8.2 Types of conversions 8.3 Market appetite for conversions 8.4 Trends at the local level 8.5 B1 floorspace losses at the local level 8.6 Types of B1 to residential conversions 8.7 B1 floorspace losses and B1 stock 8.8 B1 losses and residential gains by borough 8.9 Loss of B1 space to other residential uses 8.10 Age of office stock and conversion to residential 8.11 Office to residential: overview 9.0 Hybrid office/industrial activity 148 9.1 Servicing the services 9.2 The spatial question 9.3 The property question 9.4 The nature of demand 9.5 The importance of SMEs 9.6 Defining premises needs of hybrid office/industrial activity 9.7 Hybrid office/industrial: overview 10.0 Other issues 161 10.1 Climate change considerations 10.2 Public sector trends 10.3 Transport infrastructure and improvements 10.4 “Other” other issues Appendices 177 A1 Map showing London boroughs, CAZ, Inner London and Outer London A2 Office lettings and sales over 5,000 sq m, Central London, 2011 A3 Take-up by location and quality, in 2011 and change on 2010 (sq m) A4 Availability by location and quality end-2011 and change on 2010 (sq m) A5 Office development starts, >500 sq m, Central London, 2011 A6 Offices under construction, end-2011 A7 Office permissions, >5,000 sq m, Central London, end-2011 A8 Employment density empirical studies A9 Office forecast method A10 Climate change legislation, regulation and advice Prepared for: Greater London Authority iii By RAMIDUS CONSULTING LIMITED Date: September 2012 London Office Policy Review 2012 Readers’ notes (1) Data on potential supply, including construction activity, planning permissions and outstanding planning applications, are mainly sourced from the London Office Database of Estates Gazette Interactive (EGi) and London Residential Research (LRR) databases, supplemented where necessary by original research. (2) The London Office Policy Review is presented in metric, with the exception of rents and values. Because it is particularly prevalent within the property industry to use imperial measures when quoting rents and prices, we have quoted these in metric with imperial conversions in parentheses. (3) All sq m figures refer to net internal area (NIA) unless otherwise stated. The main area of exception is when citing occupancy densities, where the planning and construction professions use gross figures. We have highlighted where we have used GIA, particularly in Chapter 7.0 which discusses the demand forecasts. (4) Part-year time periods are generally referred to in the format of “Q1 10” (first quarter, 2010) and “H2 10” (second half, 2010). (5) For brevity, the City of London and the City of Westminster are referred to simple as the City and Westminster, respectively. (6) Reference is made to availability rates, i.e. the proportion of the total office stock in a market or sub-market that is being actively marketed for letting. Note that this is not equivalent to a vacancy rate, as some available space is occupied while being marketed. (7) In the report we use the geographical definitions given below. Central Activities Zone (CAZ), Inner London (IL) and Outer London (OL). The CAZ cuts across borough boundaries. Central London: office data on availability and take-up are based on post codes as this is the geographical unit used by the market, and for consistency with previous LOPRs. Outer Metropolitan Area (OMA): beyond London, and including parts of the South East and East of England regions. (8) A map showing London boroughs, CAZ, Inner London and Outer London is provided in Appendix A1. (9) A map showing the market area of Central London, as defined by DTZ, is shown in Figure 1.4. Prepared for: Greater London Authority iv By RAMIDUS CONSULTING LIMITED Date: September 2012 London Office Policy Review 2012 Management summary The London Office Policy Review 2012 has been prepared at a pivotal time for the London office market. A long, sustained period of growth was brought to a shuddering halt by the credit crunch of 2008 and the wider economic chaos that has ensued since. While some market actors and observers patiently await a return to the status quo ante; some evidence suggests that the market is entering a new, long-run phase. Recent change: looking back to look forward In order to fully understand London’s office market today, it is necessary to place the recent shock in its wider, historic context. In the mid-1980s, financial deregulation, technological innovation, management change and industrial restructuring all combined to underpin a substantial expansion of the stock of offices, especially in Central and Inner London. This expansion lasted through to 2008 – interrupted only by the brief early-1990s recession. But, and this is critical, even before the credit crunch, the rapid expansion of the office economy was almost certainly reaching its mature phase. As a result, it is likely that the office property market is entering – indeed is already in – an era of consolidation, organisation and product evolution. This does not discount further growth, but suggests a different pattern of growth. London’s future as a World City and global financial centre is secure for the reasonably foreseeable future, and the general picture is optimistic. Chapters 1.0 and 2.0 reveal a city that has learned how to adjust to the slings and arrows of market fortune very well, despite a very difficult post-2008 period. The employment forecasts in Chapter 7.0 indicate a dynamic metropolitan area. There will be demand for new space, and for new types and formats of office space and related employment space, but in terms of quantity, forecasts suggest there is little need for expansion beyond that already in the pipeline. The rate of growth in office jobs, 2011-2036, is forecast to be half that which prevailed over the past two decades. The key policy task will be to monitor both the quantity and quality of space emerging, balancing new proposals with others that fall out of the pipeline, so that the pipeline is responsive to changes in demand.