Central London Office Market Report Q1 2020 1 Central London office market report Q1 2020 2 Central London Office Market Report Q1 2020 Central London Office Market Report Q1 2020 3 Issue to watch - COVID-19 pandemic The COVID-19 pandemic has created a material The UK economy has effectively been placed in suspended volume of speculative development currently underway. the GFC and reach over 9% by the end of 2021, supply will uncertainty in real estate market performance. animation until normality can resume, with the government At the start of the GFC in Q2 2008, there was 12.6 million sq ft need to increase from today’s level of 10.1 million sq ft to taking dramatic steps to ensure that businesses don’t go of speculative space under construction, compared to just over 21 million sq ft. Across Europe, there is considerable variation in the bankrupt, people don’t lose the ability to contribute to society 7.0 million sq ft today. extent of the human tragedy implications unfolding and and individuals don’t lose their livelihoods or their homes. How occupiers respond will depend upon the speed and its impact on economic activity, including the trajectory, Construction is one area where we are seeing short term shape of the recovery - whether we see a short bounce-back, Sentiment has plummeted in the wake of COVID-19, with the disruption, with many office developments and internal fit-out which is likely to see a quicker return to business as usual or duration and extent of these impacts on all real estate IHS Markit/CIPS UK Services PMI falling to just 34.5 in March, projects already incurring delays. Disruption to the supply a more prolonged economic downturn which is more likely sectors. With varying policy responses across the region which is the lowest level on record and was also the fastest chain and a decrease in available workforce will continue for to lead to job losses, with a consequential release of sublease and the mitigating implications differing by market and ever monthly fall (decreasing from 53.2 in February). the foreseeable future. In Central London, many construction space. Longer-term, COVID-19 will no doubt force many sector, it is too early for us to provide a quantitative This and other poor confidence measures have filtered firms are self-regulating and suspending some or all of their companies into considering how they occupy office space, and robust assessment of value impact on 31st March, through to economic forecasts, with the UK, in line with all schemes. While at this stage it is too early to say what impact with issues such as flexibility, densification and employee our survey date. global economies, expected to see a sharp fall in economic this will have on individual scheme completion dates, we health and well-being positioned front and centre of any activity during 2020. expect the pipeline to be pushed out by 1-3 months. Given the future real estate strategy. In this context, the JLL Q1 2020 real estate performance low vacancy rates, any delay to office completions will add to indices have been held at Q4 2019 values, except where How the office market responds remains to be seen and the pressure on supply, and support rents if the slowdown is There are many questions that we cannot definitively answer there has been sufficient evidence at sector and market will be influenced by the severity and length of any economic short-lived. yet and all will have significant real estate implications. level to make appropriate any reliable adjustments downturn. At this stage, we can look back to previous Human, economic and business impacts are inevitable, recessions to provide some guidance as to how markets In previous downturns, the volume of tenant-led supply but new measures, policies and procedures, and investing to figures. have behaved to try to put today’s market into context. being returned to the market had a material impact on in the right infrastructure, will help mitigate risk in the short vacancy rates and rental values. In 2008/9, the volume of and longer-term. We will talk to the evolution of the market throughout We know that in previous downturns, most notably the Q1 in our reporting and will be continually monitoring second-hand space doubled to 14.7 million sq ft in 18 months early 1990’s recession and the global financial crisis (GFC), resulting in a peak vacancy rate of 9.1%. But contrast 2008 We will continue to monitor the situation on the ground and market movements as the situation evolves to inform vacancy rates increased sharply due to a combination of with today, where corporates have a greater emphasis on will provide updates on new and emerging trends as this our ongoing view of pricing. We will be updating our slower leasing activity and high volumes of speculative utilisation and densification of space which has driven situation evolves. forecasts, albeit these will be directional at this time, development underway at the entry point. It is interesting efficiencies and resulted in limited excess space in portfolios. broadly reflecting any meaningful changes to the to note that the current Central London vacancy rate is similar For vacancy rates to follow the same trajectory recorded in underlying fundamentals. to the entry point of the GFC, but what is different is the Impact of previous economic downturns on Central London office market supply and demand Office markets: immediate impact arl 10 receion inancial crii referend CO1 35 30 ft 25 q s n o 20 Construction delays Stalled projects and i l l i reduced cap-ex M 15 10 5 0 9 8 7 6 5 4 3 2 1 0 9 8 7 6 5 4 3 2 1 0 9 8 7 6 5 4 3 2 1 0 9 8 7 6 5 4 2 1 0 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 8 8 8 8 8 8 2 2 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 New supply Second-hand supply peclatie deelopent Take-up Work-from-home initiatives Social distancing, expanded remote work and more sq ft per person 2020-2022 speculative development includes schemes under construction as at March 2020 and reduced by year of completion. *2020-2022 supply forecasts as at February 2020 and for indicative purposes only. 4 Central London Office Market Report Q1 2020 Central London Office Market Report Q1 2020 5 Central London overview Leasing activity slows Flex share of take-up Central London vacancy rates A number of significant transactions went under offer during the COVID-19 outbreak but these may take longer to sign, Across Central London there was just 1.7 million sq ft 9.0% of take-up in Q1, the slowest start to the year since 2011. or indeed may be withdrawn, though it remains to be seen 28% 29% 28% 3% 8.0% if there has been any material impact on pricing terms. Volumes were down 22% on the Q1 10-year average 7.0% (2.2 million sq ft) and were 25% below the same period in 6.0% Prime yields in the City moved in 25 basis points to 4.0% 2019. The downturn in leasing cannot be directly attributed 5.0% across all lot sizes in February prior to the COVID-19 crisis and to COVID-19, given that most of the quarter was functioning remained unchanged for the end of the quarter, while West End under normal circumstances. 4.0% Q2 2017 Q4 2017 Q3 2019 Q1 2020 yields were held at 3.5%. 3.0% Despite the West End, City and East London all seeing 2.0% Prime rents have been held stable for the quarter at £75.00 per quarter-on-quarter declines in leasing volumes, the City 1.0% sq ft for the City and £117.50 per sq ft for the West End. started the year some 23% ahead of Q1 2019. This was 0.0% primarily due to Linklaters pre-leasing 307,000 sq ft at 20 5-year quarterly average Ropemaker Street, EC2. As a result of this transaction and a 16% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Central London investment volumes few other pre-let deals, pre-leasing remained a key driver of activity, accounting for 27% of quarterly volumes. Overall vacancy New vacancy 5.0 90% On a more positive note, under offers rose by 30% 10ear aerae oerall 10ear aerae ne 4.5 80% quarter-on-quarter, to 3.2 million sq ft at the end of Q1. 4.0 70% Central London take-up activity Of this, just under 1.8 million sq ft was under offer on pre-let 3.5 stock. Active demand also remained high at 9.9 million sq ft, 60% 12.0 Pause in investment activity 3.0 n 50% of which over half is structural and driven by a lease event. o i 2.5 l Despite a strong start to the year, COVID-19 has disrupted the l i 40% Nevertheless, given the current unprecedented circumstances, b 10.0 2.0 investment market, with a number of sales stalling over the last £ 30% many of these under offer transactions may take longer to 1.5 ft few weeks.