Member Article

Demand for office space in London soars

Demand for office space in London soars as supply hits a new low. Will the general election change this trend?

By Emer McCourt , Head of Digital and Head of Content, Search Office Space

As London’s economy booms, demand for office space in the capital rose by 16 per cent last year while supply hit a new low, with only 12.9 million sq ft available, the lowest level since 2000.

With leasehold office space in short supply, businesses are turning to serviced offices to offer more flexible rental terms, as well as reduced costs on reception services and other resources.

Data from global office brokers Search Office Space shows that enquiries for Central London office space increased by as much as 31% when comparing Q1 2012 and Q1 2015. This increase is representative of the London serviced office market as a whole and demonstrates both the increasing demand for serviced office space and the strength of the London office market.

“While supply has reduced across the London market, serviced offices have seen an on-going increase in new centres. Central London business centre openings were 68 in 2013, 85 in 2014 and as many as 31 in the first quarter only of 2015. Serviced office operators are aggressively looking to open more and more new centres with the knowledge that rising demand and a lack of overall office space will lead to high occupancy and rising revenue.” Steve Marsden, Global Sales Director, Search Office Space

Why is it, then, that supply and demand for office space has fallen out of sync?

With a population at an all-time high of 8.6 million, the capital is the powerhouse behind the UK economic recovery, leading on measures such as business start-up rates, jobs growth and productivity. It is also attracting the majority of foreign direct investment, with around 45 per cent of all projects. Digital and creative firms were the largest source of office demand last year as firms like Amazon, Google and Twitter continued to expand in the capital.

But London appears to be in danger of falling victim to its own success. Escalating house prices and rents are pushing workers further out of the centre and into the provinces, transport networks are crowded and resources are under strain.

According to a recent report by the mayor’s office, the capital is “a magnet for talent, investment and visitors” but its inhabitants face a “diminished quality of life” unless preparations for a more crowded city start now. By the middle of the century, the report says, London will need large increases in transport capacity, energy supply and digital connectivity, along with an additional 1.5million homes to house a rapidly expanding population.

It is this need for more homes that has resulted in controversial changes to planning rules which have decimated the amount of office space available despite rising demand. Millions of square feet of offices have been lost since the government made it easier for developers to convert them into homes to try to solve the housing crisis, with new permitted development rights. Westminster is one of several London boroughs which have vociferously opposed this policy. It has lost 5 per cent of its office space to residential use since the change came into effect two years ago - enough space for 78,000 workers.

With a general election looming, the Conservatives have quietly abandoned plans to relax the planning rules even further, and say the current situation will be reviewed in due course. The Lib Dems, on the other hand, have boldly pledged to scrap the policy altogether with a clear statement in their manifesto to “bring to an end the permitted development rights for converting offices to residential”. Labour, meanwhile, has promised to dramatically increase the number of new homes being built, but there is no mention of office-to-residential rights in its manifesto. Last month, however, shadow housing minister Emma Reynolds, said the policy of allowing offices to be converted to housing was having “very deep unintended consequences”.

Critics such as Ms Reynolds say that, as well as reducing vital office space, the policy is, in many cases, failing in its primary aim of providing homes for London workers. Instead, developers are transforming offices into multi-million pound luxury apartments for overseas investors. Favourable tax conditions, political stability and world-class schools and universities have helped to make London an attractive proposition for wealthy foreigners, pushing up central London property prices to make it one of the most expensive capitals in the world. Although there are concerns that Labour’s election pledges for a Mansion Tax and an end to “Non-Dom” tax status could drive away foreign wealth, it is thought that the city will, nevertheless, remain an extremely attractive location and investment opportunity.

Businesses are obviously keen to continue to attract foreign investment to the capital with the provision of prime residential property, but not at the expense of office buildings. The election appears too close to call at the moment, but whatever the result on May 7, we can be certain that the battle to save the capital’s office space, led by business leaders, London boroughs and London mayor Boris Johnson, will continue apace. Meanwhile, increasing numbers of firms are taking advantage of the ready availability and flexibility of serviced office space.

This was posted in Bdaily's Members' News section by Emer McCourt .