Sentiment in the market is bad – but is this peak disillusionment?
We’ve seen a couple of ‘generational’ events recently.
The first was Q4 2022: officially the worst quarter for office investment in London since 1996 (27 years ago). Now CoStar reports that 2023 will be the biggest year for office completions for 20 years, with 10m sq. ft. of new space added.
This is bad news for an already-high vacancy rate because “demand is unlikely to keep pace with supply”. Even though 50% of this pipeline is pre-let (including the Google ground-scraper). A lot of new supply is in the City – anecdotally a place that fewer people want to be at the moment.
The flight to quality narrative is still quoted everywhere.
And it’s pushing rents up. Here’s the most interesting data I saw….
The West End now has the most expensive office space in the world, with a net effective occupier cost of $253. per sq. ft. Hong Kong is second at $242, then the costs fall quickly to $168 in Manhattan, followed by £165 in Tokyo.
Bigger companies are taking smaller offices.
This is a trend that we noticed and liked last year.
Now there is supporting data with Cushman’s London Moves report showing 590 leasing deals in 2022, the “highest on record” and supported by a 59% y-o-y increase in sub-25k sq. ft. deals.
It means that smaller buildings benefit from better quality tenants. It’s also pushing per sq. ft. rents because occupiers save on their total costs.
Seems good for smaller landlords but bad news for big buildings.
Q1 2023 was ok…
The vacancy rate is creeping up and is c. 8% in most reports (as high as 8.8% in CoStar which covers a larger area).
Take up was 2.1m sq. ft. which is 33% below the 10-year average – not good. Under offers increased to 3.2m sq. ft., which is 7% below the 10-year average and suggests better times ahead.
It’s a hard time for Investment agents.
I was valuing something in Shoreditch this month, so I called a few agents.
Consensus is that the market is tough and that the stats are misleading. Most deals reported were agreed last year and have dragged to completion recently. There’s not much new stock to choose from with fewer people willing to trade at discounted pricing.
It’s also hard to finance anything without income, meaning that speculative and value-add sales are hard to complete.
But leasing agents are having a better time…
Many are reporting more viewings and higher activity levels. I didn’t speak to lots this month, but sentiment feels better on that side of the market.
We’re now seeing cap vals that were unthinkable 2 years ago.
It feels like a good time to buy. Sentiment is negative and discounting is quietly working its way into the market. 2 years ago it was hard to buy. Now there are several opportunities that ‘stack’.
It’s a good time to buy for anyone that has access to the limited number of deals out there.
Especially if you see a future for offices – and have the stomach to reposition and operate the assets.
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