Insight 5:

London's future

demand profile

As demand side momentum continues to build in the London office market, we assess the role of structural demand, active requirements and three specific sources of demand in sustaining the positive trajectory.

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Previous papers in The London Series have noted that the London office market is experiencing a steady increase in post-pandemic leasing volumes, expansionary demand, and a 10-year high in active demand.

We believe this momentum will be sustained during 2024, leading to an annual office take-up of 12m sq ft – an increase of 12% year-on-year and returning take-up to its long-term average. This positive forecast reflects the structural demand inherent in the market, the strength of current active demand, the next stage in the maturation of London’s tech sector and the emergence of three accretive sub-sectors.

Structural Demand

Structural demand is a significant component of our demand forecast. We recognise that some occupiers will seek to renew or regear existing leases because of a lack of certainty around their future needs, the cost-effectiveness or operational efficiency inherent in doing so, or the challenges of finding an alternative of the right quality. However, we also note that on average over the last ten years, 70% of occupiers exit at lease expiry. Applying this benchmark to the current market infers that there will be 19.8 million sq ft of demand deriving directly from London lease expiries occurring over the next three years.

Active Demand

The quantum of active demand is clear; there is 11.9m sq ft of demand deriving from 230 active requirements currently exploring market options to transact within the next 12 months. A more granular analysis of these requirements points to two dynamics.

22% of all current requirements seek more than 50,000 sq ft of office space. London continues to attract large-scale occupiers across all sectors.
77% of all current active demand or some 9.2m sq ft of requirements, derives from occupiers in three broad sector groups:

a. financial services b. professional services c. technology, media and telecommunications (TMT)

In the case of financial services, there is more than 4m sq ft of active demand. Mainstream, large-scale banks continue to reset their London portfolios but are being joined by a rich seam of niche financial and FinTech occupiers in growth mode.

In professional services, law firms have been at the vanguard of recent market activity. They are now supplemented with activity from accountancy and consulting firms preparing for potential changes in their structure or seeking a further enhancement of their workplaces.

More surprising, perhaps, is the almost 2m sq ft of active demand from the TMT sector. This figure belies the suggestion that London’s status as a hub for global tech is diminishing, given the recent downsizing of the tech titans who drove the last cycle. Instead, the nature of tech sector demand is changing.

The challenge with broad sector classifications, such as TMT, is that nuance and subtle changes in the true dynamos of the sector can often be lost. Given this, we have devised a more granular classification of the TMT sector to determine the current demand dynamic, which is explained in our paper.

London’s TMT sector is innovating and evolving. It displays a growing diversity of occupiers, new high growth areas, and is influencing the evolution of more established industry sectors. Accordingly, London’s future employment growth is forecast to be led by the technology and scientific sectors, which will outstrip the overall employment growth rate in the capital. While the TMT sector is changing, it will remain a mainstay of London’s growth and, hence, its future office demand.

Three Accretive Sources of Demand for London

Strong employment growth in the technology and scientific sectors also aligns with three emergent sectors that will constitute a more significant proportion of London’s future pool of occupiers – life sciences, education and climate tech.

Life sciences – current demand in London from the life sciences sector exceeds 750,000 sq ft(i), with increased attention from industry participants, encompassing biotech, pharmaceuticals, medtech, digital health, and associated ecosystem stakeholders. Recent years have witnessed the establishment of new headquarters and expansion driven by venture capital investments, though at rates somewhat reduced from pandemic peaks. This volume reflects the strength and diversity of London’s existing life sciences ecosystem, which benefits from world-class universities, research institutes and established strengths in high-growth niches such as AI-powered drug discovery.

Education - on our watch-list for the future, education is the lynchpin of London’s growth as a tech and innovation led-city. With education sector occupiers from across the world growing and evolving their offer as academia becomes more exposed to commercial forces, seeking to develop more robust joint ventures and alliances with businesses, and as prospective students (and often their employers) become focused on life-long and more flexible forms of learning. These factors bring education into urban centres, closer to prospective students and commercial partners.

Climate Tech - London is rapidly becoming the European powerhouse in the sector. Boosted by robust venture capital flows, London is attracting significant inward investment from active companies in this field. Almost a quarter of all Foreign Direct Investment into London during 2023 was from Climate Tech companies – double the proportion seen in 2022. As the climate crisis continues to capture attention, and society, governments, and business grapple with the means of mitigating its effects, companies innovating in the climate tech space will be thrust further into the spotlight and onto a high-growth trajectory.

(i) Knight Frank defines the life sciences sector to include pharmaceuticals and biotechnology, MedTech, digital health, and academic entities with a life sciences aspect, as well as healthcare entities with components such as laboratory services or research and development, and research institutions.