Don’t believe the (market) froth
In the last 2 years the City of London office market has reflected the volatility in the economy and the international financial crisis. From historic, pre- credit crunch levels of take-up being in the region of 1.5 million sq.ft. per quarter, the market plunged. Take-up fell to an all time low of 548,246 sq.ft. in the first quarter of 2009, only to bounce back to an almost record high of 1.97 million sq.ft. of take-up in Q4 2010.
On the face of it the rebound is remarkable, however, the reality under the market’s surface, paints a very different picture and by analysing transaction activity by size of deal a very different story emerges.
Equipe Real Estate Advisors’ Cappuccino Commentary (www.equiperealestate.co.uk/cappuccino) is a visual “ready reckoner” illustrating how occupier activity behaves across the City of London market on a quarterly basis. Behind the light-hearted title, is a piece of research showing the layers of the market in terms of size. The Cappuccino motif, correlates to the layers of the market, from the intense espresso of small deals at the bottom to the layers of milk, which as the market heats up, become progressively frothier. The chocolate sprinkles on the top are the large transactions.
The highlights of this analysis are –
Total take-up has increased for the 4th quarter in a row to 1.97m sq.ft. up from 1.835 m sq.ft. - an increase of 7.4%.
HOWEVER, 41.44% of the Q1 take-up was accounted for by only 4 transactions, totalling 816,981 sq.ft. and 44.97% of take up in the last 15 months was in only 16 transactions.
Take-up of units smaller than 50,000 sq.ft. actually fell by 29.31% from 1.262 million sq.ft. to 892,471 sq.ft.
The number of transactions completing in Q1 2010 fell by 31.74% to 157 deals – slightly less than in Q4 2008, following Lehman Brothers’ collapse.
The lowest activity was in the sub-25,000 sq.ft. size bands, where numbers of transactions reduced by over a third, in the last quarter.
As 95% of deals by number since 2004 have been under 25,000sq.ft., the total take-up figures cannot be representative of the market’s health.
The activity since the credit crunch has been encouraging, but there is cause for suggesting that as the recent wave of transactions subsides, the day to day market might settle down to a more subdued level. The average take-up under 50,000 sq.ft. for the last 2 quarters, being 14% down on the average quarterly take-up, for the 3.5 years before the credit crunch, hints at this.
The long term trend chart illustrates how during the credit boom, between 2004 and 2006, the market was frothier. With easy credit no longer available and with very tough economic conditions in prospect for some time, we expect the market to remain tough.
In some respects, a cooler market is good news for tenants who are able to move. It should, however, be noted that the supply of the new space is dwindling fast, as the companies that have moved recently have taken the best space at cheap rents.
Landlords and investors, will need to remain very savvy in making their decisions and should not be swayed by the headlines created by the large deals – particularly if they are transacting in smaller buildings.