CENTRAL LONDON OFFICE MARKET UPDATE Q1 2018 RESEARCH Real Estate for a changing world CENTRAL LONDON OFFICE MARKET UPDATE CONTACTS Brexit & the economy (which acquired record levels of Investment With further clarity emerging on a Central London office space in 2017) Q1 2018 Central London investment Daniel Bayley Head of City Agency Brexit transition deal, agreement on got off to a muted start with just volumes reached £2.35bn, down on daniel.bayley@realestate. citizens rights and the UK’s financial 150,000 sq ft of take-up recorded in the long term average quarterly figure bnpparibas STATS AT A GLANCE settlement, the result has been a Q1 2018. of £2.95bn. However, we do estimate a +44 (0)20 7338 4444 boost to business confidence. The pick-up in activity in Q2 with £4.30bn latest Deloitte CFO Survey reported Despite high levels of development currently under offer. SImon Knights an increase in optimism and positive completions both last year and this Head of West End Agency simon.knights@realestate. sentiment about the long-term effects year, large volumes of pre-letting A lack of large trophy asset sales, bnpparibas £2.35BN £4.30BN of Brexit. This has translated into an activity has kept the vacancy rate which bolstered 2017 volumes, can +44 (0)20 7318 5041 increase in demand for Central London below the long term average at 5.60%, be attributed to lower levels seen Q1 2018 office investment Currently under offer in volumes Central London offices. Indeed, levels are nearly 50% down from 6.15% in Q4 2017. We do in Q1. This type of stock which is ahead of the same period last year. not foresee any substantial rises in high on overseas buyers shopping Aidan Meynell vacancy this year despite occupiers lists, is in tight supply. Despite this, Head of City Investment aidan.meynell@realestate. The Bank of England’s survey shows continuing to rationalise their office investor demand remains strong with bnpparibas hiring intentions are at above average needs. Second hand tenant space significant capital circling Central +44 (0)20 7318 5018 levels, suggesting buoyant levels of continues to increase in relevance, London. Indeed, the latest INREV demand are set to continue despite accounting for 30% of total supply, up Investor Intentions Survey puts the Simon Glenn slow economic growth. Initial Q1 2018 from 20%, 12 months ago. UK as preferred European destination, Head of West End Investment 3.50% 4.00% [email protected] GDP estimates point to 0.4% growth. with a large proportion of that Prime yields in the West City prime yields saw no +44 (0)20 7318 5045 End remain stable in Q1 movement in Q1 2018 BNP Paribas forecast a steady upward Prime rents are being maintained by targeting London. 2018 trajectory over the next year. low levels of new development and refurbished available space which The MSCI Central London initial yield Kuldeep Gadhary Leasing have fallen by 16% over the quarter. continues to move in from 3.56% Research kuldeep.gadhary@realestate. Take-up figures in Q1 2018 reached The City and West End prime rent in Q4 2017 to 3.49% in March 2018, bnpparibas 3.71m sq ft, up 20% on the long term remains at £67.50/ sq ft and £115.00/ underpinning our view that prime +44 (0)20 7338 4844 % quarterly average and 46% up on the sq ft, respectively. yields remain at 4.00% in the City and 5.56% 30 same period last year. Unlike 2017, 3.50% in the West End. Central London Q1 2018 Tenant space accounts Fiona Don which saw >100,000sq ft deals boost Research vacancy rate, -59bps for 30% of total supply, up [email protected] down on Q4 2017 from 20% in Q1 2017 demand, the first quarter of 2018 has Central London take-up vs vacancy rate +44 (0)20 7338 4156 seen just three deals within this size 6.00 12% band complete. Deals of <5,000 sq ft Quarterly take-up Vacancy Rate are up 25% on the previous quarter 5.00 10% suggesting small to medium sized enterprises are reactivating property 4.00 8% requirements after a year of adopting a ‘wait and see’ approach. We expect 3.00 6% 3.71M 22% M sq ft Q1 2018 take-up is 20% Media Tech accounted momentum to continue into Q2 with 2.00 4% ahead of the long term for the largest share around 3m sq ft currently under offer. average quarterly figure of take-up in the first and nearly 50% ahead of quarter of 2018 1.00 2% Q1 2017 The Media Tech sector drove demand with large lettings to Google and 0.00 0% Mimecast. The Serviced Office sector Q1 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 3 www.realestate.bnpparibas.com CENTRAL LONDON OFFICE MARKET UPDATE CENTRAL LONDON OFFICE RENTS & VACANCY RATES BY SUBMARKET STRATFORD MIDTOWN Vacancy rate: 9.51% WEST END NORTHERN FRINGE Vacancy rate: 4.69% Location Q1 2018 Annual % Vacancy rate: 4.52% Vacancy rate: 1.64% 10 yr avg vacancy rate: 6.21% rent growth Stratford £45.00 5.9% 10 yr avg vacancy rate: 5.89% 10 yr avg vacancy rate: 7.78% Location Q1 2018 Annual % rent growth Location Q1 2018 Annual % Location Q1 2018 Annual % Despite continued supply rent growth rent growth Covent Garden £77.50 -3.1% pressures the vacancy rate Stratford Mayfair & St £115.00 -9.8% King’s Cross £75.00 -1.3% Holborn £65.00 -3.7% fell to 5.56%, representing James’s quarterly contraction of 59 Northern Victoria £80.00 -3.6% Islington bps. Soho £85.00 -3.4% Fringe Noho East £82.50 3.1% The majority of submarkets Noho West £85.00 -8.1% CITY Paddington £67.50 5.5% experienced falls in vacancy, King’s Cross St Pancras Vacancy rate: 6.16% Stratfordtratfordtrattf with the City market seeing the 10 yr avg vacancy rate: 8.18% largest fall of 103bps to 6.16%. Midtown Location Q1 2018 Annual % rent growth Stratford was the only The Silicon City Fringe City £67.50 -2.2% submarket to record a rise Roundabout City Fringe £65.00 4.0% in rents in Q1 2018, reaching City Tower £77.50 -3.1% key£45.00/ stats sq can ft. Rentsgo here remained West End City static in all other submarkets. Paddington Holborn Docklands Soho Covent Bank Bond Street Garden Tenant supply has risen to 30% of total supply, which Mayfair Canary equates to 3.75m sq ft. 12 Wharf months ago tenantShepherd’s supply London West Londonrepresented 20%.Bush Bridge The Shard Buckingham Palace Robust levels of demand South Bank The O2 for new development and refurbished stock has kept Knightsbridge Chiswick Park vacancy rates below average. Victoria Westminster SOUTHBANK HammersmithOver the next three years Vacancy rate: 2.67% (2018-20) we estimate space 10 yr avg vacancy rate: 5.34% Chiswick Chelsea Nine under construction totals 17m Elms Location Q1 2018 Annual % sq ft, of which 54% is already rent growth committed. Southbank £65.00 3.2% DOCKLANDS Vacancy rate: 9.88% The majority of new 10 yr avg vacancy rate: 7.51% Battersea development stock delivered Location Q1 2018 Annual % Power Station in Central London this year rent growth will be in the City. 5.60m sq Canary £42.50 -5.6% ft is due to complete, 60% is Wharf pre-let. Rest of £30.00 -6.3% Docklands 5 www.realestate.bnpparibas.com CENTRAL LONDON OFFICE MARKET UPDATE THE WEST END (W1, SW1, W2, SW3, SW7, W8, NW1) THE CITY (E1, EC1, EC2, EC3, EC4) West End take-up levels rose to constrained in Victoria with vacancy supply can be attributed to healthy The City saw strong levels of take-up in Q1 2018 reaching 1.76m sq ft, the City take-up by business sector 0.98m sq ft in Q1 2018, a 50% rise on dropping to 3.83% from 5.08% in Q4 demand for existing stock; as well highest level of quarterly take-up since Q4 2014. Boosting levels were five Services Sector Association 2% Q1 2017 and a 22% rise on the 10- 2017. as a reduction in schemes beginning lettings under construction including SMBC acquiring 161,151 sq ft at 100 Serviced Office 8% 1% Banking & Finance year average. No deals over 100,000 construction. Indeed, from Q1 2017 Liverpool Street, EC2 and Sidley Austin taking 135,545 sq ft at the Can of Retailer & Leisure 27% 4% sq ft were recorded this quarter and The Banking & Finance and Media to Q1 2018 under construction Ham, 70 St Mary Axe, EC3. Public Sector 2% buoyant levels of demand were the Tech sector’s made up the majority supply in the West End fell 94%, Property & Construction 1% result of smaller deals. Deals in the of demand during the quarter, buoyed by a number of pre-lets, The Banking & Finance sector demonstrated their commitment to the City Professional services <5,000 sq ft size bracket made up the accounting for 15% and 17%, further constraining supply. The West in Q1 and dominated demand levels accounting for 27% of take-up. The 22% Insurance 3% majority of take-up with 62% of deals respectively.