Insight 4:
Events, expansion, elevation: The key drivers
of London's occupational market
There has been no shortage of views about how occupiers will act in the post-pandemic world. As the noise from the great global workplace experiment gives way to stronger signals, occupier requirements are changing not evaporating.
London’s occupational market is gaining significant momentum. 2023 annual office take-up was up 1.4m sq ft on average annual volumes seen since the pandemic, while Q4 2023 brought the strongest quarterly take-up volume for five years. Furthermore, current active demand is at a 10-year high.
Three key aspects of the occupier mindset are combining with three dominant deal drivers to shape occupier activity in London.
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The Occupier Mindset
We have identified three aspects of the occupier mindset that, we believe, will bring increasing market activity over the next 12-24 months:
- A flexible but office centric workstyle will be the post-pandemic reality for most businesses.
- The blinkers of the Covid pandemic have been removed, with companies thinking progressively as they transform and expand.
- The Covid pandemic experience has brought a re-evaluation of the office, but the outcome is typically a different office, rather than no office.
Analysing Activity
To establish the realities of occupier decision making in the London market, we undertook a detailed analysis of post-Covid transactions. We adopted a sampling approach to create a balanced, representative sample of 102 of the 298 deals of 20,000 sq ft of more seen in the market over the period 2021-23.
The deals within the sample accounted for 7 million sq ft of take-up – around half the office space transacted over the period. Collectively, these 102 deals led to a positive net absorption of 1.1 million sq ft. Tellingly, only 32 of the 102 assessed deals led to the occupier reducing their footprint. Almost as many – 27 deals – saw the occupier more than double their space. The momentum around expansion appears to be sustained. Eighty per cent of those occupiers actively seeking 50,000 sq ft of more in London today, are planning to occupy more space than they currently do.
Deal Drivers
As well as analysing the quantum of space transacted in each deal, we also analysed the drivers underpinning each transaction. We found that there were 6 types of deal driver at work in the London market:
- Expanding sectors – businesses found within high-growth sectors such as life-sciences, elements of the tech sector or education.
- Expanding businesses – business that had their own growth opportunities which were fuelling the need for additional floorspace to accommodate future headcount growth.
- Lease events – occupiers facing upcoming breaks or expiries that were being used proactively to drive a change in real estate quantum or quality.
- Reaction to obsolescence – occupiers responding to the growing obsolescence of London’s built stock and recognising that their existing accommodation is either physically or fundamentally obsolete.
- Mobility drivers – occupiers making a proactive move into London or to a different London sub-market, to either secure best in class product, make a step change in their business or take advantage of London’s recent transport infrastructure upgrades.
- Consolidators - businesses seeking to bring multiple offices into fewer holdings, and in numerous cases a single building, or a scaling back real estate to reflect new operational realities.
Three of the six drivers were most prevalent in our sampled transactions – lease driven events, business expansion, and a reaction to building obsolescence. Our view is that these drivers will continue to drive occupier activity over the next cycle.
Figure 1 Prevalence of Deal Drivers (% of all deals)
Our analysis of real market activity, together with our daily engagement with a wide spectrum of occupiers, illustrates that London’s occupational market is in stronger health than the headlines would have you believe. Whilst there are occupiers who have been actively rightsizing their London footprint, many more have been moving in the opposite direction.
There can be no doubt that, the occupier mindset, when mixed with growing physical and functional obsolescence and the greater use of real estate as a strategic device to support wider and more progressive business agendas, will create a rich seam of market demand going forward. No one can afford a bad office anymore. As a result, the post-Covid era of occupier mobility, driven by events, expansion and elevation, is upon us.
"Our forensic analysis of real market activity, together with our daily engagement with a wide spectrum of occupiers, illustrates that London’s occupational market is in stronger health than the headlines would have you believe.”
For more information on Occupier Strategy and Solutions and this insight article, please contact:
Lee Elliott
Partner, Head of Global Occupier Research
Richard Proctor
Partner, Head of UK Occupier Strategy and Solutions and London Tenant Representation