How will the market adapt to changing supply and demand dynamics?

Market dynamics have led to demand for large floors in Core markets

Principally driven by reasons of efficiency and flexibility, office occupiers in Central London have a clear preference for large floorplates. This is evidenced by our latest data, which shows that larger floorplates are leasing better than small floorplates. In the past year total take-up across Central London was 9% lower than the 10-year average. However, there have been more floors of 20,000 sq ft and larger acquired than we would typically expect (up 5% on average). In contrast, the number smaller floorplates leased (those of 5,000 sq ft or smaller) is down 18% on trend levels.

Buildings able to satisfy requirements across as few floors as possible have performed well in the market. Of the 670 Central London deals smaller than 50,000 sq ft that have transacted since the start of 2022, 620 were split across no more than two floors.

In terms of location, the best performing market in Central London in the last 12 months was the City, where take-up was 16% above average. Within the City market, the Core of the City has outperformed the other City submarkets with take-up of 19% above the trend level. Not only is a preference for high quality locations evident, but high-quality buildings have also outperformed. Of the 4.5 sq ft of Core take-up in the City seen in the last 12 months, 55% has been for development space.

The evidence from the leasing data is clear; corporate occupiers want the best quality space, in the most central locations within each individual submarket and they would like to fulfil their requirements across as few floors as possible. The drivers of this trend (efficiency, environmental sustainability, recruitment and retention of talent etc) will persist, but the problem facing occupiers now is this type of space is of scarce supply.

Demand has decimated supply of large floors in Core markets

To take an example, in the last 12 months in the City Core 66 floors of over 20,000 sq ft have leased, 50 of which were within brand new buildings or buildings in the development pipeline. Across all qualities of space (secondhand, new and under construction due to complete within 12 months) in the City Core, there are just 49 available floors of 20,000 sq ft or larger. For brand new, ready to occupy space, occupiers looking for floors of 20,000 sq ft or larger within the City Core currently have a choice of just three floors.

The supply of new, high-quality large floors is even scarcer in the West End Core than it is in the City Core. At the end of Q2 2024, there were no available floors larger than 20,000 sq ft in the West End Core and only eleven of 10,000 sq ft or larger. Narrowing this figure down further shows that there was only one newly completed ready-to-occupy floor in the West End Core larger than 10,000 sq ft available for lease at the end of Q2 2024.

City occupiers are being creative

There are signs that City occupiers will be more willing to accept smaller floorplates and to split occupation across a larger number of floors. There are currently four whole buildings in the City Core ranging in size from 35-70,000 sq ft under offer to single occupiers: 25 Moorgate, 101 Moorgate, 15 Bishopsgate and The Whittington Building. Part of the appeal of single-tenanted buildings is the potential for branding opportunities and the perception of a greater level of control, but outside of flexible office operators there are relatively few notable examples of transactions in recent years. The tenants on the four buildings that are currently under offer are three firms of solicitors and one global insurance company.

Another option for occupiers seeking large floorplates will be to seek alternative submarkets with greater levels of supply of large floors, or a pipeline of supply of large floors. One notable example would be Southbank, where there are currently two buildings under construction larger than 300,000 sq ft that are being speculatively developed, both of which are able to offer floorplates larger than 20,000 sq ft.

Until the next wave of development arrives in Core markets, the choice for large occupiers seeking the best quality space will be to split the requirement over a larger number of floors or to explore markets outside of their preferred areas.