THE LONDON OFFICE MARKET - Q3 2020 A GUIDE TO RENTS, RENT FREE PERIODS & MARKET TRENDS - Carter Jonas
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RESEARCH THE LONDON OFFICE MARKET Q3 2020 A GUIDE TO RENTS, RENT FREE PERIODS & MARKET TRENDS Follow us on Twitter, LinkedIn & Instagram
“Rising vacancy, “NOT SINCE THE
SUMMARY OF KEY TRENDS
Contrast with market conditions
declining rents and prior to the pandemic when many 2008 / 09 GLOBAL
longer rent free London businesses were investing FINANCIAL CRISIS HAS
for growth but were facing challenges THERE BEEN SUCH A
period incentives will in attracting the brightest and the GOOD TIME FOR TENANTS
become the hallmarks best to their workforce. Real estate TO TAKE ADVANTAGE For the remainder of 2020, and much of 2021, the following trends are
of the London office was, rightly, widely seen as an OF WEAK MARKET likely to become widely established in the London office market:
market over the important factor in developing an CONDITIONS TO SECURE
coming months.” effective employee recruitment and COMPETITIVE FINANCIAL
retention strategy. AND TENANT-FRIENDLY Advertised Rents Office Vacancy
During the summer there has been Much of the pre-pandemic demand LEASE TERMS.”
• a
decline in advertised rents for both • a n increase in the availability of
a plethora of emerging trends for London office accommodation
new and second-hand space reflecting second-hand, tenant-controlled,
in the London office market that was focussed on the new space
rising vacancy and weak demand sub-let space as occupiers downsize
have evolved in the wake of the market as businesses sought to trade
and offload surplus accommodation
COVID-19 pandemic. up into better quality premises with
Rent Discounts • an increase in new Grade A space
As leasing activity picks up, the objective of using their work
• a
n increase in the discounts that can vacancy as developments that
following the lifting of lockdown environment as a recruitment tool.
be negotiated on advertised rents as were started during the 2018 / 19
restrictions, further trends will While real estate will no doubt
competition for fewer footloose construction cycle reach completion
begin to emerge and the extent to continue to be an important factor in
tenants intensifies • the emergence of the availability of
which rents and rent free periods attracting and retaining a productive
new, previously unoccupied, surplus,
are adjusting to a more challenging and profitable workforce, businesses
Rent Free Periods Grade A space being offered by
business climate will become will be looking at ways to reduce
tenants that, prior to the COVID-19
apparent. This report, prepared operating costs in order to maintain • a
continued widening in rent free
pandemic, entered in to pre-letting
by the Carter Jonas Research and profitability in a challenging economic period incentives
agreements on buildings that were
Tenant Representation Teams, environment, where new opportunities
under construction
provides a summary of how events for revenue growth will be scarcer. Lease Length
in the London office market are likely Rising office vacancy, weak • a
move to shorter leases and the Office Relocation Activity
to unfold over the coming months to demand, declining rents and an inclusion of more regular tenant only
assist those tenants with upcoming expansion of rent free periods are • a
decrease in the number of tenants
break options, as demand for greater
lease expiries, rent reviews and break therefore likely to be the hallmarks proceeding with their plans to invest
lease flexibility increases
options in developing their post of the London office market for the in an office relocation, reflecting the
lockdown accommodation strategies. foreseeable future. These factors uncertain business climate and the
The bargaining position of tenants
Salaries typically represent the do, of course, present opportunities need to preserve working capital
• a
shift in favour of tenants in
highest operating cost of most for tenants that are facing a lease
the bargaining position in Serviced Offices
businesses, closely followed by real expiry or break option - by offering
lease negotiations
estate costs. Headcount reduction in more choice and falling real estate • a
short term uptick in demand for
some business sectors is therefore costs. Not since the 2008 / 09 global serviced and co-working space from
Downsizing
likely to follow the ending of the financial crisis has there been such those tenants with imminent lease
furlough scheme, in tandem with an a good time for tenants to take Michael Pain • a
n increase in the number of businesses expires and break options seeking
advantage of weak market conditions Head of Tenant downsizing their real estate footprint to to downsize and requiring ‘stop-gap
increase in the volume of surplus
Representation Team minimise exposure to real estate costs,
tenant controlled office space being to secure competitive financial and 07715 001013 accommodation’ until the business
brought to the market. tenant-friendly lease terms. michael.pain@carterjonas.co.uk and also reflecting reduced headcount climate becomes more certain
“GIVEN THAT ONE OF THE KEY INGREDIENTS OF OFFICE DEMAND IS £ per sq ft per annum UF= Upper Floors
THE LONDON
JOB CREATION, IT IS VERY LIKELY THAT DEMAND FOR OFFICE SPACE Location Grade A Grade B OFFICE MARKET –
WILL REMAIN WEAK UNTIL UK AND WORLD ECONOMIC GROWTH New/Refitted Refurbished Refurbished TYPICAL LANDLORD’S
IS RESTORED TO THEIR TREND LEVELS, AND SERVICE SECTOR City
ADVERTISED RENTS
EMPLOYMENT GROWTH RESUMES - SCENARIOS THAT MAY TAKE AT Q3 2020
LEAST 12 – 18 MONTHS TO MANIFEST THEMSELVES.” Prime - Bank, Leadenhall Street £62.50 - £75.00 £50.00 - £65.00 £40.00 - £49.50
(UF = £77.50 - £92.50) (UF = £67.50 - £85.00)
(SPACE OVER 5,000 SQ FT)
Secondary - Blackfriars, Aldgate £57.50 - £68.50 £45.00 - £57.50 £38.00 - £45.00
(UF = £70.00 - £85.00) (UF = £65.00 - £77.50)
City Fringe
North - Shoreditch, Clerkenwell £65.00 - £75.00 £55.00 - £65.00 £38.00 - £55.00
(UF = £75.00 - £90.00)
North West - Farringdon, Smithfield £70.00 - £85.00 £57.00- £68.50 £40.00 - £56.00
(UF = £87.50 - £92.50)
Supply Demand
East - Spitalfields £60.00 - £75.00 £48.00 - £60.00 £37.50 - £46.50
During the summer there has been Office vacancy in both the new and • t he adoption of new operating
East - Aldgate East, Wapping £50.00 - £59.50 £38.00 - £48.50 £34.00 - £37.00
an increase in second hand office second hand markets in most size practices – lockdown measures (UF = £60.00 - £69.50)
vacancy – a trend that is likely to gather ranges, in many parts of London, is have forced many businesses to re-
South Bank
pace over the coming months as a therefore set to rise during 2020 and evaluate the way that they operate
Waterloo, Southwark, London Bridge £67.50 - £75.00 £52.00 - £66.50 £39.50 - £52.50
consequence of: 2021. However, given the increasing - with a much greater bias, now, (UF= £76.50 - £92.50) (UF = £67.50 - £75.00)
GRADES OF OFFICE
importance of employers providing towards working from home, and
Battersea, Nine Elms, Vauxhall £55.00 - £67.50 £45.00 - £53.50 £37.50 - £43.00
ACCOMMODATION
• d ownsizing – as some occupiers a work environment that underpins shift working – to comply with social
East London
reduce headcount and offload the wellbeing of the workforce, it is distancing requirements. Some of For marketing purposes office
surplus office space to reduce their probable that demand trends over those businesses that were thinking Docklands Prime £50.00 - £57.50 £32.50 - £42.50 £27.50 - £35.00 accommodation is generally
– Canary Wharf & Wood Wharf (UF = £58.50 - £62.50) (UF = £45.00 - £50.00)
operating costs in the wake of the coming months will become of moving to larger premises are now categorised into Grades which
lower revenues focussed more on new space and questioning the need for more floor Docklands Secondary - Crossharbour £32.50 - £39.50 £27.50 - £32.50 £22.50 - £27.50 are defined as follows:
• business failures – requiring landlords accommodation that has been refitted space and are, instead, favouring Stratford £45.00 - £49.50 £35.00 - £45.00 £22.50 - £29.50
to take back non-income producing with new building services, including the option of staying put, enabling Grade A
West End
space for re-letting air conditioning and passenger lift working capital to be re-allocated for Central - Mayfair, St James's (Prime) £110.00 - £125.00 £85.00 - £105.00 £65.00 - £77.50
Space fitted with air
systems, rather than on lower grade new business generation initiatives to (UF= £130.00 - £140.00) conditioning & passenger lift
Vacancy levels are also set to second hand space, providing that it boost revenues. Central - Mayfair, St James's (Secondary) £87.50 - £100.00 £72.50 - £88.50 £62.50 - £72.50 facilities & fully accessible
increase in the new space office market is competitively priced. raised floors for data /
North - Euston £65.00 - £78.50 £55.00 - £65.00 £42.50 - £52.50
as developments that were started Demand for office space across telecoms cable management
during the 2018 / 19 construction London, and across virtually all “TRENDS IN SUPPLY AND North East - Fitzrovia £78.00 - £90.00 £63.00 - £78.50 £48.00 - £62.50
cycle reach completion. However, the business sectors, has weakened DEMAND WILL, FOR THE North West - Marylebone £78.00 - £92.50 £65.00 - £78.50 £50.00 - £62.50 Grade B
exposure of some developers to non- significantly since the first quarter of REMAINDER OF 2020 AND (UF = £95.00 - £110.00)
Accommodation that typically
income producing floor space will, in the year as a direct consequence of
MUCH OF 2021, CONSPIRE South - Victoria, Westminster, Haymarket £72.50 - £85.00 £57.50 - £72.50 £45.00 - £55.00
incorporates under floor or
some cases, be lower than anticipated, the economic slowdown precipitated
TO DEPRESS RENTS AND (UF = £87.50 - £92.50)
perimeter trunking for data /
reflecting the fact that a significant by the COVID-19 pandemic.
FOSTER LONGER RENT South West - Knightsbridge £82.50 - £95.00 £72.50 - £80.00 £60.00 - £70.00
telecoms cable management,
number had entered in to pre-letting The decline in demand for
FREE PERIODS.” East - Soho, Regent Street, £82.50 - £97.50 £67.50 - £82.00 £50.00 - £66.00 rather than raised floors, and /
Leicester Square (UF = £95.00 - £110.00)
agreements with tenants early on in the office space is being driven by two or air cooling facilities, instead
construction programme, before the key factors: The ongoing ‘Brexit’ trade West - Paddington £70.00 - £78.50 £55.00 - £66.50 £42.50 - £52.50 of an air conditioning system
negotiations with the European Union (UF = £82.50 - £90.00)
outbreak of the COVID-19 pandemic. that dehumidifies & draws
However, this raises the possibility of • e
conomic uncertainty – a add another layer of uncertainty Midtown
fresh air in to the building
those tenants that committed to leasing significant number of those in an already challenging business North - King’s Cross £72.50 - £87.50 £60.00 - £72.50 £47.50 - £57.50
large tracts of floor space on pre-let businesses that were considering a environment which is likely to South - Covent Garden £70.00 - £82.50 £55.00 - £69.50 £47.50 - £55.00 Refitted space
agreements now offering some of that move prior to the outbreak of the further depress demand for London (UF = £83.50 - £88.50)
Accommodation where the
space to the market on sub-leases, COVID-19 pandemic have chosen office space. East - Holborn £62.50 - £70.00 £52.00 - £62.50 £40.00 - £50.00 entire building, including
following a reassessment of their floor to put their relocation plans on Given that one of the key ingredients (UF = £72.50 - £80.00)
the common parts, has been
space needs in the wake of COVID-19. hold and are taking a ‘wait and of office demand is job creation, it is West - Bloomsbury £75.00 - £90.00 £60.00 - £72.50 £45.00 - £55.00
refitted and is “as new”,
Landlords of new developments see’ approach before committing very likely that demand for office South West London incorporating new building
that have been part pre-let could to a large capital investment space will remain weak until UK and
Chelsea £75.00 - £87.50 £62.50 - £72.50 £47.50 - £60.00 services, including lighting, air
therefore find themselves competing programme that an office world economic growth is restored
West London
conditioning and passenger
for a dwindling number of footloose relocation represents. The trend to their trend levels, and service
lift facilities
sector employment growth resumes - Kensington £55.00 - £65.00 £45.00 - £53.50 £32.50 - £45.00
occupiers with the very tenants that towards tenants taking short term
they had earlier pre-let space to. lease extensions on their existing scenarios that may take at least 12 – 18 Hammersmith £52.00 - £59.50 £40.00 - £50.00 £35.00 - £42.50
Refurbished space
The City of London, in particular, is space to ‘tread water’ is likely to months to manifest themselves. (UF = £55.00 - £57.50)
Premises where the existing
vulnerable to a significant increase in increase over the coming months, White City £45.00 - £55.00 £40.00 - £45.00 £32.50 - £40.00
building services have been
office vacancy given that it is the sub- reflecting the uncertain business Chiswick £47.50 - £55.00 £37.50 - £46.00 £32.50 - £37.50
overhauled, rather than
market with the biggest stock of office climate and the risks associated Ealing £40.00 - £50.00 £36.50 - £42.50 £30.00 - £36.50
replaced with new
buildings and represents the largest of with a potential second wave of
£40.00 - £48.00 £35.00 - £42.50 £30.00 - £35.00
all the key London business districts. the COVID-19 virus. Source: Carter Jonas Research
Advertised Rents advertised rents in lease negotiations “OVER THE NEXT 6 – 12
The underlying investment value are increasing. MONTHS IT IS VERY
of commercial properties is much During Q1 2020, discounts on PROBABLE THAT THERE
more sensitive to headline rents than advertised rents were typically 1.5 – WILL BE A DECLINE IN
the levels of incentives offered by 3.5%. However, discounts of between ADVERTISED RENTS OF
landlords, such as rent free periods. 5 and 10% are becoming increasingly BETWEEN 10 – 15%”
As a consequence, there has, since common. This trend is likely to continue
the outbreak of the COVID-19 for the foreseeable future.
pandemic in March, been little
discernible change in the levels of
advertised rents for both new and Rent Free Periods
refurbished office space that is In a trend that mirrors that witnessed
being offered directly by landlords during the 2008 / 09 global financial
on new leases. crisis, rent free periods have widened
significantly since March this year,
reflecting the fact that landlords
Future Movements In are now having to compete quite
Advertised Rents aggressively with each other, and with
Over the next few quarters is tenants with surplus ready fitted space,
its very likely that reductions in to secure lettings from a considerably
landlord’s advertised rents will smaller pool of footloose tenants.
become widespread as competition
intensifies between landlords with The tables below illustrate the
vacant new and refurbished space movement in rent free periods over
and tenants that are offering new, the last two quarters:
surplus, pre-let Grade A space and
second-hand, lower cost, ready fitted
out ‘plug in and go’ accommodation Typical Rent Free Periods – City, West End, Midtown & South Bank
on flexible sub-leases.
Landlords with vacant space Q1 2020 Q3 2020
and tenants with surplus space will 5 year lease 9 – 12 months 12 – 16 months
therefore be competing against each 10 year lease 20 – 24 months 25 – 28 months
other in a market characterised by
rising vacancy and weak demand.
To compete effectively, the Typical Rent Free Periods – Docklands
landlords of new space, that will
typically not be ready fitted out, Q1 2020 Q3 2020
will need to either reduce their 5 year lease 12 – 14 months 14 – 17 months
advertised rents and offer longer
10 year lease 24 – 27 months 26 – 30 months
rent free periods and / or fit the
space out for the incoming tenant –
and bear some of that fit out cost.
Over the next 6 – 12 months The rent free periods associated with
it is very probable that there will the Docklands office market reflect
be a decline in advertised rents the wider disparity between supply
of between 10 – 15% for both new and demand compared with the
and refurbished office space as other London office sub-markets.
competition to attract tenants from Depending upon how long a
a significantly diminished demand particular property has been on
pool increases. the market, and how indebted the
landlord might be to its financiers,
it is quite probable that longer rent
Rent Discounts free periods than those set out
Despite the fact that there has been above could be negotiated on
little movement in advertised rents some buildings.
for new and refurbished space that is The trend towards longer rent
being offered by landlords since the free periods is likely to continue
beginning of Q2 2020, there is for the foreseeable future as office
growing evidence demonstrating vacancy rises against a backdrop of
that the discounts being offered on weak demand.
Lease Length Workplace Design -
Weak demand and rising vacancy ‘Repurposing’ The Office
is conferring a stronger bargaining The issues referred to above
position in lease negotiations on are common to many service
those tenants that have an imminent sector businesses and it is for
break option or lease expiry. these reasons that the COVID-19
It is becoming easier for occupiers pandemic is unlikely to consign the
to secure shorter tenancies with concept of working in an office to
more frequent tenant-only break the annals of history. Rather than
options – to provide greater dispensing with the need for office
flexibility – and a hedge against the space, employers are ‘repurposing’
economic uncertainties associated the way in which they are using
with a possible resurgence in the their premises.
spread of the COVID-19 virus. The use of office space as a
‘hub’, in tandem with an advanced
desk booking system, is an
Working From Home – operating model that is becoming
The Practical Issues popular – enabling employees
Although activity in the London the option of meeting up with
office market has been muted since colleagues while being reassured
the introduction of the Government’s that their employer is controlling
lockdown measures, several of the office headcount to comply with
larger international law firms, that social distancing in the workplace.
were the key drivers of demand for The reconfiguration of existing
office space in the 60,000 sq ft plus accommodation, to render it
market segment during the first more suited to teams that will be
quarter of this year, are reportedly attending the office to participate
continuing their property searches. in collaborative projects, is another
The recent letting of c 150,000 sq ft emerging trend, in parallel with
at 280 Bishopsgate, EC2, to global adopting new operating practices
law firm Baker McKenzie, which that are more biased towards home
employs over 1,000 staff in London, working and shift working.
is one such example. In a recent survey of service
This trend should come as little sector businesses carried out by
surprise for several reasons: Carter Jonas, the majority of
those canvassed explained that
• like many knowledge based they have every intention of
businesses, a law firm’s operating retaining an operating model
model is arguably less suited predicated on working from
to staff working from home for office premises, emphasising the
prolonged periods if junior and importance of having:
middle ranking staff are to be
trained effectively, and gain • a focal point for the business
sufficient experience, to drive the • a place to interact with clients
business forward and prospective clients
• the home environment for those • ‘project space’ where teams can
with young children is less likely collaborate, explore ideas
to be conducive for the quiet and innovate
contemplation required to • a forum to promote the
draft and analyse complex wellbeing of employees through
legal documents social interaction – to combat
• data security – the retention and the sense of isolation conferred
protection of sensitive client by prolonged home working
hard copy and digital data is best
achieved by keeping it within the In short, COVID-19 is unlikely to
security of the office, rather than sound the death knell of the office
transporting it and using it in the as a hub to operate a business.
home environment
THE SERVICED &
CO-WORKING OFFICE
MARKET
Serviced & Co-Working “IT HAS BEEN RECENTLY
Office Space REPORTED THAT THE
The rapid expansion of the serviced RENTS BEING ACHIEVED
and co-working office sector in ON SERVICED AND
London throughout the last few CO-WORKING SPACE
years has resulted in overcapacity in LETTINGS DURING THE
the sector. SUMMER MONTHS HAVE
Even before the COVID-19
BEEN AT A DISCOUNT OF
pandemic, evidence was gathering
UP TO 20%”
that all was not well in the serviced
and co-working sector as leading
providers quietly closed down some
of their poorly-performing business
centres. The funding issues being
experienced by prominent co-
working space provider, WeWork,
are also well documented.
It is very likely that the trend on the grant of a serviced /
towards rationalisation in the sector, co-working agreement – in
that had started during Q1 2020, will contrast to the grant of a lease on
continue for the foreseeable future, conventional office space.
particularly given the vulnerability of But beware! If a move to
serviced and co-working operators serviced / co-working space is being
to rental income voids – a direct considered, it would be prudent to
consequence of a business model carry out a financial health check
predicated on offering short term on the provider of the selected
lease flexibility to its customers. space before parting with your rent
Serviced and co-working space deposit, given that the number of
providers also have heavy exposure serviced and co-working space
to start-up companies, particularly providers that cease trading, or
from the ‘tech’ sector - a significant that decide to close down under-
proportion of which are vulnerable performing business centres, is likely
to having their venture capital to rise over the coming months.
funding withdrawn in a challenging
business climate.
However, evidence is building Serviced & Co-Working
up of a modest uptick in demand Office Rents
from the lockdown lows of several Rents in the serviced and co-working
months ago as some occupiers office sector across London are
take advantage of break options falling in the wake of increasing
and lease expiries to downsize from vacancy and weak demand, as
their conventional office space, competition hots up between
taking advantage of lower rents providers for fewer footloose
and the short term lease flexibility occupiers, compared with the
that serviced and co-working beginning of the year.
accommodation offers. It has been recently reported that
Serviced and co-working space the rents being achieved on serviced
also provides a quick, plug in and and co-working space lettings
go, cash-flow friendly, workplace during the summer months have
solution with no requirement to been at a discount of up to 20%
invest significant sums of working compared with pre-COVID-19 rents –
capital in an expensive fit out. a trend that is likely to persist for the
There is also no stamp duty payable foreseeable future.
THE TENANT
REPRESENTATION TEAM KEY CONTACTS
Michael Pain Partner
Our tenant representation services include:
Head of Tenant Representation Team
07715 001013
michael.pain@carterjonas.co.uk
• S
erviced & co-working • Relocation budgeting
property searches and & planning Daniel Francis Head of Research
negotiations • L
ease & rent 07801 666137
• B
reak option linked lease review negotiation daniel.francis@carterjonas.co.uk
re-negotiation • Repairs/dilapidations cost
Ed Caines Associate Partner
• W
orkplace design & assessment & negotiation
07966 188632
floorspace re-configuration • B
uilding, air conditioning ed.caines@carterjonas.co.uk
• M
arketing & leasing services – & passenger lift surveys
surplus space • B
usiness rates analysis Luke Wild Associate Partner
• C
onventional office space & appeal 07780 667013
luke.wild@carterjonas.co.uk
search & cost appraisal • Service charge audit
• Office move management Georgia Eckert Associate
07826 884704
georgia.eckert@carterjonas.co.uk
For more data on the London office market, office availability,
rents & rent free periods, market trends & information on Anders Horwood Surveyor
budgeting & planning for a lease renewal, rent review or office 07836 246049
relocation please contact one of the team. anders.horwood@carterjonas.co.uk
One Chapel Place, London W1G 0BG
OUR EXPERIENCE
Lease negotiations and relocations 10,000 sq ft+
43,000 sq ft 17,500 sq ft
UK Payments Administration Hackett Limited
2 Thomas More Square, E1 The Clove Building, SE1
39,000 sq ft 16,000 sq ft
Care Quality Commission Circle Housing
151 Buckingham Palace Road, SW1 Two Pancras Square, N1
28,000 sq ft 15,000 sq ft
Warner Bros/Shed Media Hitachi Rail Europe
85 Grays Inn Road, WC1 40 Holborn Viaduct, EC1
27,000 sq ft 11,000 sq ft
Reinsurance Group of America Salamanca Group
22 Bishopsgate, EC2 50 Berkeley Street, W1
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