London,
10
January
2019
|
11:41
Europe/London

A tale of two office markets: prime stock set to outperform as rents diverge

Prime office rents expected to rise 10% over next five years while secondary rents are expected to fall by 5% over same period

For the first time on record, a clear difference has emerged in the Central London office market between the performance of new office space and secondhand office space, according to the latest report by CBRE.

Secondhand space - defined as space that is not newly completed, is not under construction or has not undergone major refurbishment before being marketed - is undergoing a supply and demand imbalance resulting in a divergence in rental values between new and secondary office accommodation for the first time.

At the end of Q3 2018, the availability of secondhand space stood at its highest level since 2010 whereas the availability of new and early marketed space was at its lowest since 2001, with demand for that space increasing. Prior to 2016, the supply and demand profiles for new and secondhand space moved in unison, but now demand far outstrips supply in new office space, while there is an oversupply of secondhand space, accounting for 72% of total availability – a 16 year high.

CBRE forecasts that whilst rents for the best located, highest quality offices are expected to grow by 2% on an annualized basis from 2018 to 2022, rents on secondary space are expected to fall by 1% annually. This divergence, which is a trend CBRE expects to continue, could eventually lead to a two-tier market with different rent profiles.

This trend is driven by a change in occupier behavior whereby decisions are informed by factors other than costs. CBRE’s 2018 EMEA Occupier Survey showed that whilst cost is still the main factor driving occupational decisions, other workplace factors are becoming increasingly important, including brand image, technology, sustainability and wellness, leading occupiers to opt for more high quality work environments.

Kevin McCauley, CBRE's Head of Central London Research
Whilst a ‘flight to quality’ often happens later in the cycle, this trend is underpinned by fundamental shifts in occupier behaviour as employers are under increasing pressure to create high quality workspaces that appeal to their employees. Newer buildings also lend themselves more easily to being flexible, something that has been the key driver of demand in recent years and consolidation and densification within companies has seen a further drive towards new, more modern space. It is a trend we expect to continue so landlords should seek advice on how to creatively and efficiently utilise their secondhand space in order to compete in a more polarised market.
Kevin McCauley, CBRE's Head of Central London Research