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  • Central London Office Market Report Q1 2020 1

    Central London office market report Q1 2020

  • Central London Office Market Report Q1 20202 Central London Office Market Report Q1 2020 3

    The COVID-19 pandemic has created a material uncertainty in real estate market performance.

    Across Europe, there is considerable variation in the extent of the human tragedy implications unfolding and its impact on economic activity, including the trajectory, duration and extent of these impacts on all real estate sectors. With varying policy responses across the region and the mitigating implications differing by market and sector, it is too early for us to provide a quantitative and robust assessment of value impact on 31st March, our survey date.

    In this context, the JLL Q1 2020 real estate performance indices have been held at Q4 2019 values, except where there has been sufficient evidence at sector and market level to make appropriate any reliable adjustments to figures.

    We will talk to the evolution of the market throughout Q1 in our reporting and will be continually monitoring market movements as the situation evolves to inform our ongoing view of pricing. We will be updating our forecasts, albeit these will be directional at this time, broadly reflecting any meaningful changes to the underlying fundamentals.

    Issue to watch - COVID-19 pandemic

    The UK economy has effectively been placed in suspended animation until normality can resume, with the government taking dramatic steps to ensure that businesses don’t go bankrupt, people don’t lose the ability to contribute to society and individuals don’t lose their livelihoods or their homes.

    Sentiment has plummeted in the wake of COVID-19, with the IHS Markit/CIPS UK Services PMI falling to just 34.5 in March, which is the lowest level on record and was also the fastest ever monthly fall (decreasing from 53.2 in February). This and other poor confidence measures have filtered through to economic forecasts, with the UK, in line with all global economies, expected to see a sharp fall in economic activity during 2020.

    How the office market responds remains to be seen and will be influenced by the severity and length of any economic downturn. At this stage, we can look back to previous recessions to provide some guidance as to how markets have behaved to try to put today’s market into context.

    We know that in previous downturns, most notably the early 1990’s recession and the global financial crisis (GFC), vacancy rates increased sharply due to a combination of slower leasing activity and high volumes of speculative development underway at the entry point. It is interesting to note that the current Central London vacancy rate is similar 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

    Central London Office Market Report Q1 20202

    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.

    volume of speculative development currently underway. At the start of the GFC in Q2 2008, there was 12.6 million sq ft of speculative space under construction, compared to just 7.0 million sq ft today.

    Construction is one area where we are seeing short term disruption, with many office developments and internal fit-out projects already incurring delays. Disruption to the supply chain and a decrease in available workforce will continue for the foreseeable future. In Central London, many construction firms are self-regulating and suspending some or all of their schemes. While at this stage it is too early to say what impact this will have on individual scheme completion dates, we expect the pipeline to be pushed out by 1-3 months. Given the low vacancy rates, any delay to office completions will add to the pressure on supply, and support rents if the slowdown is short-lived.

    In previous downturns, the volume of tenant-led supply being returned to the market had a material impact on vacancy rates and rental values. In 2008/9, the volume of second-hand space doubled to 14.7 million sq ft in 18 months resulting in a peak vacancy rate of 9.1%. But contrast 2008 with today, where corporates have a greater emphasis on utilisation and densification of space which has driven efficiencies and resulted in limited excess space in portfolios. For vacancy rates to follow the same trajectory recorded in

    the GFC and reach over 9% by the end of 2021, supply will need to increase from today’s level of 10.1 million sq ft to over 21 million sq ft.

    How occupiers respond will depend upon the speed and shape of the recovery - whether we see a short bounce-back, which is likely to see a quicker return to business as usual or a more prolonged economic downturn which is more likely to lead to job losses, with a consequential release of sublease space. Longer-term, COVID-19 will no doubt force many companies into considering how they occupy office space, with issues such as flexibility, densification and employee health and well-being positioned front and centre of any future real estate strategy.

    There are many questions that we cannot definitively answer yet and all will have significant real estate implications. Human, economic and business impacts are inevitable, but new measures, policies and procedures, and investing in the right infrastructure, will help mitigate risk in the short and longer-term.

    We will continue to monitor the situation on the ground and will provide updates on new and emerging trends as this situation evolves.

    Central London Office Market Report Q1 2020 3









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    Early 1990s recession Financial crisis COVID-19EU referendum

    New supply Second-hand supply Speculative development Take-up

    M ill

    io n

    sq ft

    Construction delays

    Work-from-home initiatives

    Stalled projects and reduced cap-ex

    Social distancing, expanded remote work and more sq ft per person

  • Central London Office Market Report Q1 20204 Central London Office Market Report Q1 2020 5

    Central London overview

    Leasing activity slows Across Central London there was just 1.7 million sq ft of take-up in Q1, the slowest start to the year since 2011. Volumes were down 22% on the Q1 10-year average (2.2 million sq ft) and were 25% below the same period in 2019. The downturn in leasing cannot be directly attributed to COVID-19, given that most of the quarter was functioning under normal circumstances.

    Despite the West End, City and East London all seeing quarter-on-quarter declines in leasing volumes, the City started the year some 23% ahead of Q1 2019. This was primarily due to Linklaters pre-leasing 307,000 sq ft at 20 Ropemaker Street, EC2. As a result of this transaction and a few other pre-let deals, pre-leasing remained a key driver of activity, accounting for 27% of quarterly volumes.

    There were few larger transactions this quarter, which goes some way to explain the contraction in leasing activity, with just six deals signed in excess of 25,000 sq ft, compared to a Q1 5-year average of 18 deals. The other factor that contributed to the low volumes was a significant decline in activity from the flexible workplace sector, which accounted for just 3% of volumes (53,000 sq ft). This was sharply down on the five-year quarterly average leasing share of 16%.

    On a more positive note, under offers rose by 30% quarter-on-quarter, to 3.2 million sq ft at the end of Q1. Of this, just under 1.8 million sq ft was under offer on pre-let stock. Active demand also remained high at 9.9 million sq ft, of which over half is structural and driven by a lease event. Nevertheless, given the current unprecedented circumstances, many of these under offer transactions may take longer to complete than usual and some active demand may be deferred or aborted as the true extent of COVID-19 becomes clear.

    Supply remains low There was a marginal uptick in the vacancy rate to 4.3%, up from 4.1% at the end of 2019. This upturn was evident across all three major markets, but both the City and West End remain characterised by sub-4.0% vacancy while East London saw vacancy rates in excess of 11% by quarter end. The new vacancy rate was stable at just 0.7%, with both the City and West End recording a new vacancy rate of below 0.5%.

    Looking forward, speculative space under construction reached 6.9 million sq ft, which was a 6% increase over the quarter. While a number of schemes started on site early in the quarter, totalling just under 1 million sq ft, the volume of speculative completions was at a historical low. Many construction firms are temporarily halting work on sites across Central London. Given that new vacancy is currently low, any delay to office developmen