savills.co.uk/research 01 City Office Market Watch October 2014 Supply and demand snapshot n September saw a record amount of City take-up in one month at 1.5m sq ft. This has brought total take-up for the year to date to 6.29m sq ft, which is 26% up on this point last year. n The large take-up in September can be primarily explained through three deals which amounted to 868,000 sq ft alone. Amazon completed on their 430,000 sq ft pre-let of Principal Place, E1 this month along with taking 115,000 sq ft of interim space at Leadenhall Court, 1 Leadenhall Street, EC3. Furthermore, M&G acquired a 322,000 sq ft pre-let at 10 Fenchurch Avenue, EC3. n Another notable deal from September is the acquisition of 49,500 sq ft at Albert House, 1-4 Singer Street, EC2 by The Office Group at a rent believed to be just under £40 per sq ft. This deal highlights the strong activity seen this year from serviced office operators. n Serviced office operators have already accounted for 260,000 sq ft of take-up this year, which is a 74% increase on the equivalent take-up period last year (Graph 1). If we consider space currently under-offer, we expect the industry's total take-up to exceed 350,000 sq ft this year, which is roughly the same amount for the years 2005 - 2011 combined. The increase in demand for this type of workspace is due to the rise of smaller, mostly technology based companies who require flexible lease lengths and a 'co-working' environment. n As previously forecasted, the vacancy rate has continued to fall this month. Supply is currently at 7.9m sq ft producing a vacancy rate of 8.2%, down from 8.7% last month. Supply has fallen on average 5% each month over the last three months, and we expect this trend to continue across the next year. n The continued strong take-up combined with the constraint on supply will have a positive effect on rental values. We have already seen evidence of this in that the average prime rent for the City has risen since Q1 2014 from £60.39 per sq ft, to £65.06 per sq ft for Q3 2014. n Furthermore, the average grade A rent for Q1 was £47.42 per sq ft, which has risen to £50.07 per sq ft for Q3. City core average grade A rent has risen from £46.13 per sq ft for Q3 2013 to £50.38 per sq ft for Q3 this year, and in the Fringe it has risen from £47.78 to £49.53 per sq ft (Graph 2). n The falling trend of tenant incentives provides further evidence that the market is moving in favour of the landlord. For instance, in Q3 last year the average amount of months given rent free for a 10 year lease with no breaks was 23, this has since dropped to 21 months for Q3 this year. City take-up is now 26% up on this point last year, all but confirming total take-up will exceed that of last year Source: Savills Research, N.B. 2014 data as of end September Source: Savills Research GRAPH 1 Serviced Office Operator take-up Source: Savills Research GRAPH 2 Average Rents Savills Research UK Commercial TABLE 1 Key September stats September stats Monthly change Take-up 1,543,653 sq ft Supply 7.9m sq ft Vacancy Rate 8.2% Top rent £69.50 Demand 8.3m sq ft
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savills.co.uk/research 01
City OfficeMarket Watch October 2014
Supply and demand snapshot
n September saw a record amount of City take-up in one month at 1.5m sq ft. This has brought total take-up for the year to date to 6.29m sq ft, which is 26% up on this point last year.
n The large take-up in September can be primarily explained through three deals which amounted to 868,000 sq ft alone. Amazon completed on their 430,000 sq ft pre-let of Principal Place, E1 this month along with taking 115,000 sq ft of interim space at Leadenhall Court, 1 Leadenhall Street, EC3. Furthermore, M&G acquired a 322,000 sq ft pre-let at 10 Fenchurch Avenue, EC3.
n Another notable deal from September is the acquisition of 49,500 sq ft at Albert House, 1-4 Singer Street, EC2 by The Office Group at a rent believed to be just under £40 per sq ft. This deal highlights the strong activity seen this year from serviced office operators.
n Serviced office operators have already accounted for 260,000 sq ft of take-up this year, which is a 74% increase on the equivalent take-up period last year (Graph 1). If we consider space currently under-offer, we expect the industry's total take-up to exceed 350,000 sq ft this year, which is roughly the same amount for the years 2005 - 2011 combined. The increase in demand for this type of workspace is due to the rise of smaller, mostly technology based companies who require flexible lease lengths and a 'co-working' environment.
n As previously forecasted, the vacancy rate has continued to fall this month. Supply is currently at 7.9m sq ft producing a vacancy rate of 8.2%, down from 8.7% last month. Supply has fallen on average 5% each month over the last three months, and we expect this trend to continue across the next year.
n The continued strong take-up combined with the constraint on supply will have a positive effect on rental values. We have already seen evidence of this in that the average prime rent for the City has risen since Q1 2014 from £60.39 per sq ft, to £65.06 per sq ft for Q3 2014.
n Furthermore, the average grade A rent for Q1 was £47.42 per sq ft, which has risen to £50.07 per sq ft for Q3. City core average grade A rent has risen from £46.13 per sq ft for Q3 2013 to £50.38 per sq ft for Q3 this year, and in the Fringe it has risen from £47.78 to £49.53 per sq ft (Graph 2).
n The falling trend of tenant incentives provides further evidence that the market is moving in favour of the landlord. For instance, in Q3 last year the average amount of months given rent free for a 10 year lease with no breaks was 23, this has since dropped to 21 months for Q3 this year.
City take-up is now 26% up on this point last year, all but confirming total take-up will exceed that of last year
Source: Savills Research, N.B. 2014 data as of end September
Source: Savills Research
GRAPH 1
Serviced Office Operator take-up
Source: Savills Research
GRAPH 2
Average Rents
Savills Research UK Commercial
TABLE 1
Key September statsSeptember
statsMonthly change
Take-up 1,543,653 sq ft
Supply 7.9m sq ft
Vacancy Rate 8.2% Top rent £69.50 Demand 8.3m sq ft
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Market Watch | City offices
TABLE 7
Demand & Under Offers
TABLE 6
Development pipeline
Analysis close upTABLE 2
Monthly take-up
Sq ft % Grade A Total % Grade A % chg on prev month
Vacancy rate (%)
Sep-13 506,596 43% 7,663,359 79% 1.3% 8.0%
Oct-13 431,489 70% 7,603,389 80% -0.8% 7.9%
Nov-13 354,710 66% 7,163,250 80% -5.8% 7.5%
Dec-13 1,279,021 80% 6,762,769 78% -5.6% 7.0%
Jan-14 523,894 62% 7,699,510 79% 13.9% 8.0%
Feb-14 392,845 90% 7,596,745 78% -1.3% 7.9%
Mar-14 383,818 80% 7,931,546 75% 4.4% 8.3%
Apr-14 405,984 64% 9,361,041 80% 18.0% 9.8%
May-14 777,760 90% 9,142,794 79% -2.3% 9.5%
Jun-14 861,232 89% 9,214,569 80% 0.8% 9.6%
Jul-14 933,037 70% 8,712,152 79% -5.5% 9.1%
Aug-14 467,274 78% 8,339,046 80% -4.3% 8.7%
Sep-14 1,543,653 88% 7,890,856 80% -5.4% 8.2%
TABLE 5
Supply
TABLE 4
Rents
£ per sq ft Top achieved
Average
Grade A Grade B Prime* Rent free**
Sep-13 £55.00 £43.35 £31.22 £57.15 23
Oct-13 £70.00 £53.00 £36.50
Nov-13 £62.50 £49.57 £35.83
Dec-13 £70.00 £52.53 £35.38 £64.45 21
Jan-14 £72.50 £45.63 £39.15
Feb-14 £62.50 £46.25 £31.32
Mar-14 £70.00 £46.56 £28.01 £60.39 19
Apr-14 £63.50 £46.42 £27.92
May-14 £72.50 £48.96 £42.67
Jun-14 £80.00 £49.91 £33.22 £63.70 20
Jul-14 £65.00 £48.42 £36.16
Aug-14 £64.00 £50.65 £36.59
Sep-14 £69.50 £50.44 £36.80 £65.06 21
City Potential demand (sq ft) 2,364,000
City Active demand (sq ft) 5,968,000
City Total demand (sq ft) 8,332,000
% change on 12 month ave 2%
Total under offer (sq ft) 2.0m
Under offer this month (sq ft) 419,667
% change on average 70%
Landlord controlled supply 76%
Tenant controlled supply 24%
*Average prime rents for preceeding 3 months *
* Average rent free on leases of 10 years with no breaks for preceeding 3 months
Completions due in the next 6 months are included in the supply figures
Sq ft Refurb Devs Total%
Pre-let
2014 2,550,877 2,903,010 5,453,887 43%
2015 832,596 2,300,272 3,132,868 56%
2016 1,573,456 2,925,654 4,499,110 21%
2017 946,729 3,452,070 4,398,799 9%
Total 5,903,658 11,581,006 17,484,664 31%
Sq ft% change on previous year
% Grade A
Jan 13 - Sept 13
4,993,232 56% 75%
Jan 14 - Sept 14
6,289,497 26% 81%
TABLE 3
Year to date take-up
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Market Watch | City offices
Address Floor/s Sq ft Grade Rent achieved Tenant Lessor
Principal Place, Shoreditch High Street, E1 1 - 15 430,917 A Confidential Amazon Brookfield
10 Fenchurch Avenue, EC3 3 - 13 & Part Mezzanine 322,686 A Confidential M&G Generali/CORE
Leadenhall Court, 1 Leadenhall Street, EC3 Building 115,000 A Confidential Amazon (Interim space) Brookfield
Albert House, 1 - 4 Singer Street, EC2 Building 49,523 B £39.50 The Office Group A & A Investments
30 Finsbury Square, EC2 LG, 2 29,572 A £36.55 Grant Thornton Invesco
85 Fleet Street, EC4 B, 5, 6, 7 29,521 A Confidential Radcliffes LeBrasseur Norton Rose Fulbright
20 Fenchurch Street, EC3 24 23,876 A Confidential Vinson & Elkins Land Securities/Canary Wharf
75 King William Street, EC4 G, 1 22,602 A Confidential S Three Ltd SWIP
Thames Exchange, 10 Queen Street Place, EC4 Part 1 21,746 A Confidential Bates Wells Braithwaite Lembaga Tabung Haji/
KMW
Address Postcode Available Sq ft Comments
The Shard SE1 375,000 6,500 sq ft under offer
Aldgate Tower E1 317,000
Aldwych Quarter WC2 278,000
The Leadenhall Building EC3 270,000 24,000 sq ft under offer
71 Queen Victoria Street EC4 187,000
Cannon Place, Cannon Street EC4 125,000 65,000 sq ft under offer
120 Holborn EC1 117,000
3 Thomas More Square E1 110,000
Alphabeta Building EC2 40,000
5 Cheapside EC2 40,000
TABLE 8
Significant September transactions
TABLE 9
Significant supply
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Market Watch | City offices
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