In the aftermath of the vote to leave the EU, much of the focus in London has been on whether the city’s financial services companies can maintain their current employment levels.
With the Conservative Party losing its overall majority in the recent election, it is increasingly difficult to predict the outcome of the impending Brexit negotiations. Despite a series of unprecedented political events London’s commercial property market has shown considerable resilience with less traditional occupiers making headlines and driving take-up. We have analysed occupier take-up by business sector across London’s submarkets in order to establish which submarkets have proved most successful at attracting non-financial tenants, and identify those that have work to do.
The financial services sector has always focused on the City Core submarket, where banks, insurance firms and business services have traditionally been the largest space takers. Looking forward, diversification is key to the City and West End. Following announcements from the largest investment banks stating their intention of moving some operations abroad, the City of London’s undisputed position as the centre for financial services is perhaps no longer so strong.
The West End core, defined under the Mayfair and St James’s submarkets, is where hedge funds and private equity companies locate in order to be in close proximity to wealthy clients of the West End. By mapping take-up since Q1 2016 by tenant sector, as shown in the map below, it is shown that media based take-up is not significant over 10,000 sq ft in the West End core, the market instead has a strong position in attracting the financial services firms that are able to pay the highest rents. Furthermore, floors over 10,000 sq ft are relatively scarce in the West End core. In lower size categories, premium occupiers are still prepared to pay record rents for the best space, with Lawrence Stroll recently taking space at 5 St James’s Square at £190.00 per sq ft.
In the City Core market, the situation is improving with a number of media-based occupiers recently taking space. A key example is the recent pre-let to Deliveroo at the River Building, where the delivery company took 51,500 sq ft. Principal Place and the Shard lie on the boundary of City Core and have both received strong media-based take-up. However, larger media occupiers tend not to base their headquarters in the City, preferring areas such as King’s Cross or Southbank. As of now, larger financial occupiers are continuing to lease City Core space. Examples include the Leadenhall Building, The Scalpel and 100 Bishopsgate.
It is interesting to note that a number of City developers are now marketing their buildings so as to be attractive to media occupiers in the future. For example, 22 Bishopsgate, currently under construction in City Core, will “put people first” with 100,000 sq ft in the 1.275 million sq ft building to be dedicated to wellness. Buildings are often marketed with exposed ceilings in order to attract media occupiers, as opposed to the more traditional suspended ceilings.
In the City Fringe market, clustering of media occupiers is clear and provides a strong contrast to City Core. An entrepreneurial culture, powered by large numbers of talented young people that have decided to make east London their home (attracted by cheaper house prices than in west London), has contributed to the rise of City Fringe as a market.
Developments such as White Collar Factory, The Bower and the White Chapel Building have proved successful at attracting media tenants and other sectors due to the landlords providing additional incentives, such as flexible leases and top-class digital connectivity; the White Collar Factory even has a running track on its roof. Start-ups want flexible leases as they feel unable to commit to the more rigid leases of the more established markets.
Interestingly, a large number of serviced office operators occupy space in City Fringe, reflecting the occupational wish to have more flexible space and a corresponding response from the supply side. A number of developments, such as White Collar Factory, and more widely Nova in Victoria, have serviced office operators taking occupation. This not only attracts new occupiers but also helps occupiers already in the building that do not wish to take a new lease but occasionally require the additional meeting or project space. According to Strutt & Parker research, serviced office take-up grew year on year from 2010 before peaking in 2015 at just under 1.4m sq ft up 53% on 2014 where take-up was 900,000 sq ft.
It is worth noting that the City Core, and other markets, have also recently seen growth in serviced office space with WeWork taking the whole of 15 Bishopsgate in Q1 2017. Therefore, although the take-up figures show media related take-up is still relatively negligible in larger markets, this may not fully reflect the bigger picture as media occupiers may be taking space within these serviced offices.
Within the City Fringe market, take-up in the west and north is almost solely media focused. However, the south and east is more diversified with the St Katharine’s Dock area attracting more traditional sectors. Derwent London’s The White Chapel Building consists of a diversified tenant mix, as does Aldgate Tower.
In markets such as Victoria, Soho, Covent Garden and North of Oxford Street, there is good tenant sector diversification. This is especially the case within high profile developments such as Nova South, where 55% is let; Nova North, where 22,000 sq ft recently let to Child & Child and Verde, where 60% is let.
In Covent Garden and Soho, developments such as 77 Shaftesbury Avenue, where 20,893 sq ft let to Snapchat in the same quarter as the 9,302 sq ft letting to Invest Cloud, signify good tenant diversification. 30 Broadwick Street has shown similar appeal across a range of occupiers with lettings to Jagex, a software company, and to financial/professional services companies: EQT and BCG Digital Ventures. Financial services tenants such as EQT would traditionally have been associated with the core West End submarkets of Mayfair and St James’s but have made the decision to occupy in western Soho in order to be in close proximity to some of their clients, but also in order to appeal to young professionals who are attracted to the less formal work environment. In Midtown, recent lettings to COS, at 1 New Oxford Street; and to McKinsey, at the neighbouring Post Building; reflect a similar trend.
New markets such as Kings Cross and Vauxhall/Nine Elms/Battersea have arisen following on from large amounts of development activity. The King’s Cross Central development has notably attracted a range of tenants including Google, XTX Markets and New Look. In Battersea, Apple has prelet 500,000 sq ft at Battersea Power Station in a deal that has given a significant boost to the area and represents a vote of confidence in London.
In Canary Wharf, diversification is also surprisingly good considering it has long been associated with financial services. Although deals such as that to HSBC at 25 Canada Square continue, deals to Time Inc. and Capgemini create a better tenant mix. It is notable that the area is adopting mixed-use developments into its skyline. The Wood Wharf development, for example, will make up 30 buildings of which the tallest building, a 57-storey skyscraper, will be residential.
The reality of classifying tenants under one sector is difficult considering the multiple fields each tenant operates in. For example, Amazon (Principal Place) is defined under ‘Technology and Telecommunications’ as an internet related service. However, with the recent announcement that Amazon will be opening shops, this definition will soon be out of date. Additionally, JP Morgan was recently labelled a “technology company” by its CFO, despite its prominence as an investment bank. JP Morgan Chase has 40,000 technologists and a $9bn technology budget.
Tenant diversification has become of increased importance to landlords in markets where financial services currently dominate the tenant mix. There is however, evidence of improvement and, looking long-term, the TMT sector grew 11% from 2006 to 2017 with Finance falling 7% during the same period . As financial services become less of a growth driver, it may fall upon non-traditional sectors to fill the gaps. Looking forward, encouraging co-working and flexible office space may help bring about the necessary shift.