London Development

Spotlight: London Development April 2017
 
Looking out for future office growth

4 April 2017. Words Steven Lang

With central London office rents at a record high, focus is turning on the city’s outer boroughs to provide more flexible and cost-effective workspace solutions to meet London’s dynamic growth

 

The vote to leave the EU has thrown London’s businesses into a sustained period of uncertainty. However, business decisions will still need to be made during the next two years and we believe that London will face a shortage of workspace that matches the changing needs of London’s businesses. This heightened degree of uncertainty will lead businesses to demand more cost-effective and flexible real estate solutions and this trend could present a huge opportunity for the outer London boroughs.

A review of employment forecasts across the 33 London boroughs for the next five-year period shows that the demand for workspace will continue to increase. However, the most active drivers and locations of this demand are going to change. For example, the arts and entertainment sector is forecast to show 11% employment growth in the next five years in Tower Hamlets, but only 6% in Hammersmith and Fulham. This demonstrates the varying fortunes, geographically, across the capital.

Increasing demand for workspace

Employment in inner London is expected to rise by around 72,000 across the three key business sectors of arts and entertainment, financial and business services and information/communications (see table below), compared to 20,000 in outer London. Using an average employment density, this equates to a gross additional need for 5.8 million sq ft of offce space over the next five years for inner London. For outer London, the total is 1.6 million sq ft.

So, is there enough additional office space planned across London for this growth? In inner London, excluding City and West End, there is 3.2 million sq ft of new office space planned during the next five years. In outer London, there is only 707,000 sq ft. This points to a dramatic shortfall between the supply of and demand for office space in outer London.

While some of this shortfall is down to developers focusing on the central locations where the highest rents are achievable, another factor has been the conversion of office space to residential under the Permitted Development Rights. We estimate that across London, at least 3 million sq ft of office space has been lost to change of use in the last three years.

TABLE 1

Employment and five-year growth for key sectors 2021 employment levels and predicted fi ve-year growth (between 2017-2021) for both inner and outer London

 
Employment and five-year growth for key sectors 2021 employment levels and predicted fi ve-year growth (between 2017-2021) for both inner and outer London

Source: Oxford Economics

Meeting local needs

This lack of supply in some outer London areas has been good news for some landlords and developers as it has resulted in substantial rental growth in markets such as Croydon, Wimbledon and Ealing. Indeed, grade A rents have increased by up to 40% in certain markets. Many of these occupiers have been outmigrators from central London. For them, the rents still look comparatively cheap. However, it is worse news for local occupiers and start-ups in these suburban locations. In order to accommodate London’s future growth, we believe that landlords, developers and planners need to ensure that a full range of quality, price points and tenure of workspace is on offer.

Even if office rents start to fall in central London, it will remain one of the more expensive global office locations, so businesses will continue to relocate outwards, or possibly adopt a hub-and-spoke model. Furthermore, the uncertainty around Brexit will intensify the need for those who run London’s businesses to make clever real-estate decisions. These will be based not just around the cost of property, but the message that the move and location sends to staff.

 

FIGURE 1

Destination central London 1.3 million daily commuters travel in to Zone 1. Savills has ranked, highest to lowest, the UK local authorities that have residents who commute to Zone 1. The blue area represents those local authority areas that account for 50% of the total daily Zone 1 commuters. The green is those local authorities that account for the next 30% of the total and begins to show the commuter belt around London. The yellow is the next 10% of the total. The remaining 10% is spread throughout the UK

 
Destination Central London

Commuters reaching their limit

Successful locations are not just about workplaces or homes, but the integration of the two. In London, as staff commutes get longer and more expensive, due to the rise of central residential costs, dissatisfaction with commuting has risen.

If commuting is not satisfactory, then what will the location of future office space look like? Of course, the City and West End markets will remain important. The question is whether we’ll see an office network on an intra-regional scale, ie Greater London rather than nationally. Could companies take smaller offices in various locations throughout Greater London? According to the Savills/BCO What Workers Want survey, 50% of workers in London commute for 46-90 minutes (each-way) compared to just 22% nationally. Furthermore, 29% of London office workers would most like to change their ‘length of commute’ compared to 21% nationally. A work location that minimises commute times would be more attractive to employees. This can be achieved in outer London as transport infrastructure improves.

Adopting a new style of working

These real-estate decisions need not just be about traditional ways of working. Co-working and other types of managed workspace already enable businesses to have greater flexibility on location and tenure. In the future, we expect that this sector will go beyond the physical space and will become much more community driven. Could this be co-located with residential? Yes. Indeed, one of the attractions of outer London to employers is the more mixed-environment.

Outer London is already facing a shortage of suitable workspace. This needs addressing for the health of local businesses, residents and in-migrators. The supply-side answer is not to adopt a one-size-fits-all approach, but to ensure that a truly mixed offer is delivered in terms of quality of space, price point and flexibility of tenure.

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