City Offices - getting the balance right

City Offices
Getting
the Balance
Right
March 2014
Intro text
City Offices: Getting the Balance Right is published by the City of London Corporation and City
Property Association. The joint authors of this report are DTZ and Jones Lang LaSalle. This report
is intended as a basis for discussion only. While every effort has been made to ensure the accuracy
and completeness of the material in this report, the authors, DTZ/Jones Lang LaSalle and the City of
London Corporation/City Property Association, give no warranty in that regard and accept no liability
for any loss or damage incurred through the use of, or reliance upon, this report or the information
contained herein.
Contents
Executive Summary
2
Introduction4
Trends in the composition of City office stock
5
Balance of existing stock changing due to larger scale completions
7
Balance of existing supply shows rising proportion of Grade A
8
Larger floor plates not necessarily restrictive for small firms
8
Future supply to continue trend to larger buildings
Occupier migration and sectoral demand
9
11
Firm migration puts the City at the cutting edge
13
Growth of serviced office providers
14
Trends in sectoral demand
14
Central London market perspective – opportunities and challenges for the City
19
Outlook for continued growth of the Central London office market
22
Competing London locations
23
Competitive occupier costs relative to other London locations
23
Increasingly footloose occupiers
25
Infrastructure improvements
27
Limited development pipeline in the City over the next few years
28
Forecasting required City office stock
29
Employment outlook stronger in the fringes than core City
31
Trends in density
22
Calculating the required increase in stock for the City and Inner London
22
What are occupiers looking for?
35
Productivity agenda key for corporates
37
The war for talent
38
Importance of place making
38
A vibrant retail offering
39
Residential proximity
40
Contacts43
City Offices
Getting the
Balance Right
1
Executive
Summary
New stock is increasingly delivered via a
smaller number of large, tall buildings, and this
will continue
It is more efficient and profitable for developers to
provide this type of product, and there is strong
occupier demand for large floor plates. It does
put pressure on the amount of units appropriate
for smaller firms which are important to the vitality
of the occupier mix, but this has largely been
overcome by sub-divisibility and the fact that
smaller occupiers can move to surrounding areas
on the edge of the City.
The competitive City market is characterised
by the ‘survival of the fittest’, and firm
migration should be encouraged
The market is dynamic and accustomed to
reinvention; as occupiers come and go over time,
the sectoral mix changes. Over recent years the
level of demand from banks and other financial
firms has declined, while demand from the TMT
sector has risen. In future, we expect the influence
of technology to permeate all sectors, making it
more difficult to segment occupiers.
City Offices
Getting the
Balance Right
2
Central London’s economy will continue to
grow rapidly, allowing the City to enhance
its reputation as the leading centre for
international business
It is well placed to benefit from continued growth
in London’s output, population and employment
as well as its extremely favourable demographics,
which will continue to provide it with a young,
highly skilled workforce with global connections.
Office-based employment in the City will
continue to expand – although not as quickly
as in some emerging locations outside the
traditional core
The City will not become less important as long as
it continues to provide a superior offer, underlining
the importance of providing suitable new stock,
or at the very least, a continual upgrading of
existing stock. As has happened in the past, we
see no reason why it will not be able to renew and
expand its office stock to meet future challenges,
even if a more constrained development finance
market results in more pre-letting.
The City needs to compete with other
locations within London to attract
footloose occupiers
The City needs to market itself holistically, and
broaden awareness of its diversity and ability
to cater to a wide range of potential occupiers
Increasing occupier mobility and the growth of
what is perceived as ‘Central London’ presents
a challenge to established core markets. The
City already faces competition from areas such
as King’s Cross, Southbank, Victoria and Canary
Wharf. The options will only widen with time, with
office development likely to intensify in Waterloo,
Battersea, Royal Docks and Stratford. The City’s
relative affordability has prompted moves from
the West End, bolstering demand, but it may not
always be the automatic choice.
The City would benefit from marketing itself
holistically as the location of choice within the
expanding Central London market, rather than
as a series of individually competing buildings
and developments. The City would also gain by
refocusing its marketing on its ability to meet the
needs of a wide range of potential occupiers.
While the financial community will remain central,
a shift of focus on presenting the Square Mile as
an all-purpose business location would maximise
its ability to attract occupiers from all over Central
London, and beyond.
Occupier preferences are changing, with a
focus on locations that enable them to boost
productivity and attract and retain talent
Corporate productivity will be the strategic
objective driving property demand over the
next decade, now that cost reduction as an
opportunity has largely been explored. Across
all sectors the priority is an environment which
can accommodate a range of work styles, one
which facilitates communication and collaboration.
Alongside this, occupiers are facing a ‘war for
talent’, with employee well-being becoming central
to recruitment and retention. This will need to be
reflected in workspace and workplace. Occupiers
will be looking for locations which provide an
attractive environment for staff to work, socialise
and in many cases, live. This will entail extensive
transport networks and linkages for all mode of
travel, quality built environment, an attractive retail
offer and close proximity to residential areas.
The City needs to adapt to these occupier
trends, which apply across all sectors
The City provides world class buildings and a wellestablished cluster for leading global businesses
across several key sectors, as well as access
to London’s cultural facilities and global links.
However, this does not make it immune from
these broader occupier trends and their increasing
influence on locational choice, which will impact
on the City’s traditional financial services occupiers
just as much as other sectors.
The City has made great improvements in
its place-making, and needs to continue and
further this agenda
The City has made great strides in placemaking through its area strategies, for instance
through pocket parks, pedestrianisation, roof
gardens, new public space and enhancement to
Cheapside, St Paul’s and Monument. However,
it is increasingly competing with developments
which, starting from scratch, with few or no legacy
issues, are creating very attractive environments
in combination with high quality office space.
Encouraging a ‘work/live/play’ lifestyle, including
more weekend vibrancy, would help to ensure
ground floor level is just as attractive to occupiers
as the higher floors of the most popular towers.
Place-making should be seamlessly integrated
within the development process.
While protection of the City’s capacity to
increase its office space is a paramount
objective, a carefully considered and gradual
increase in residential in strategic locations
may be desirable
Providing for future growth in office stock is
key to the long-term success of the City, but in
established clusters an increase in residential
provision should also be encouraged. Some
residential development has already taken place
both in the City and its immediate fringes, and
future occupiers will view a residential offer as
complementary to their occupation, in order to
meet demand from the workforce for proximity to
work. This would contribute to the encouragement
of a ‘work/live/play’ lifestyle, adding to the City’s
attraction and acting to future-proof its appeal to
the occupiers of the future.
City Offices
Getting the
Balance Right
3
Introduction
London is expanding rapidly, and in the context of
a nascent economic recovery the outlook for both
the near and the long-term is for continued growth
in population, occupier demand and the provision
of office stock.
The City is the focal point of the London office
market, and a leading centre for international
business. The growth of London presents a
great opportunity for the City to grow and
enhance its reputation. However, the needs
of occupiers are changing, and within Central
London are becoming more open-minded about
location. Meanwhile, other office markets are
emerging in response to rising occupier demand
and improvements in transport linkages across
London.
Published by the City of
London Corporation, March
2013 (hereafter referred to as
the Taking Stock report)
1
Published by the City of
London Corporation, January
2014 (hereafter referred to as
the Firm Migration report)
2
City Offices
Getting the
Balance Right
4
This opportunity and this challenge set the scene
for this report, which builds on two earlier studies
published by the City of London Corporation. The
first, Taking Stock: The Relationship Between
Businesses and Office Provision in the City1
quantifies and reviews the breadth and depth of
the City’s office stock, and goes on to describe
its occupational profile as well as recent changes.
The second: The Effect of Firm Migration on the
City of London2 examines the characteristics and
trends exhibited by businesses within the City
of London and the surrounding areas, including
trends in migration into and out of the area, as well
as the coherence and durability of clusters.
This report begins by assessing the key findings
from the two reports, using the latest market data
to assess key trends in the composition of City
office stock and sectoral demand. This is then
put in the context of the latest developments
in the broader Central London office market. In
particular, we explore the growth of the London
market, and the increasing competition from other
locations.
The latest trends in occupier demand are
analysed, including the factors affecting occupiers’
choice of location and stock. Finally, conclusions
are drawn on the strengths and weaknesses of the
City, and whether the approach to development
needs to change in order to meet the needs of old
and new occupiers in the years to come.
Note on geographic boundaries: unless otherwise
stated, we use a definition of the City of London
office market which comprises the postcodes
EC1-4. This is slightly larger than the City
Corporation boundaries as a large part of EC1 lies
in Islington and Camden, and a small part of EC2
in Hackney, The office stock covered by EC1-4 is
88 million sq ft, compared to Taking Stock’s audit
conclusion of 69m sq ft in the City proper. Where
we speak of City and Fringes we mean City plus
E1 and SE1, a total stock of 113m sq ft. In the
same way, Central London is composed of the
City (comprising the EC1-4 postcodes), Mid Town
(WC1-2), West End (SW1 and W1), Docklands
(E14), South & East Fringes (SE1 and E1) and
North & West Fringes (NW1, N1C, N1, SW3,
SW7, W2) markets.
Trends in the
composition
of City office
stock
This section demonstrates how
new buildings in the City have
become larger over time, a trend
that is expected to continue. It is
more efficient and profitable for
developers to provide this type
of product, and there is strong
demand for large floor plates. It
does put pressure on the amount
of smaller units available for smaller
firms who are important to the
vitality of the occupier mix, but
this is largely overcome through
sub-divisibility and the increased
options on the edge of the City
where they can secure suitable
floor space at more modest rents.
Trends in the
composition
of City office
stock
Balance of existing stock
changing due to larger scale
completions
The Taking Stock report outlines how the City’s
stock has shifted towards larger units and the
effects upon the size of the stock occupied. It
observes that ‘Today, 65% of the City’s total office
stock is in units over 100,000 sq ft; but of the
stock built since 1997, 79% is in this size band’.
In contrast, more than half of occupiers are in
units of less than 5,000 sq ft (not just small firms
but also commonly divisions of much
larger businesses).
On the face of it, this suggests that the City of
London may be at risk of failing to provide a
sufficiently diverse office stock. However, the
research also shows that it is actually fairly evenly
distributed between the size bands in terms
of the number of units, with no single size
band dominant.
A slightly different picture emerges if we look at
recently completed stock in the City (EC1-EC4).
Over the period 2009-2013, there was 8.3 million
sq ft of completions in this area. Of this, 6.5 million
sq ft was in units of more than 100,000 sq ft,
equivalent to 78% of the total floor space. Looking
at the number of schemes, as opposed to floor
space tells a similar story. Schemes in excess of
100,000 sq ft account for the largest proportion of
completions over 2004-2008, 27 out of a total of
60 (45%). This is not new; the same trend can be
observed over the preceding 5 year period from
2004-2008. In short, modern buildings are likely to
be larger, a finding which is also endorsed by the
Taking Stock report.
City Offices
Getting the
Balance Right
7
Figure 1: City (EC1-EC4) Completions by size
band 2009-2013 (no. of schemes)
Figure 2: City (EC1-4) Supply by grade 1994
– 2013 sq ft
100%
7%
Total completions: 60
100,000 plus
18%
45%
50,000 - 99,999
25,000 - 49,999
90%
80%
70%
60%
50%
40%
30%
20%
30%
10,000 - 24,999
Under 10,000
10%
0
1994
1996
Grade A
Source: JLL
2002
2004
2006
2008
2010
2012
2014
Grade B/C
Source: DTZ
Larger floor plates not
necessarily restrictive for
small firms
A sustainable level of both new and second-hand
supply is essential to ensuring there is adequate
occupier choice. According to the 2013 London
Office Policy Review, a vacancy rate of 8% is an
indication of a balanced market. While availability
is not the sole measure of health, a certain level is
important if it is to perform its economic role.
Supply within the City (EC1-4) is fairly evenly split
between the size bands as shown in the chart
below. Around 40% of supply is in units greater
than 50,000 sq ft, with just 5% in units of less
than 6,001 sq ft. On the face of it a potential
mismatch between supply and demand, as
outlined in the Taking Stock report, could cramp
the ability of small to medium sized organisations
to find suitable space. However, as an indicator,
supply by size band has its limits, as offices can
be subdivided – offered by discrete floors, or even,
if suitably serviced, in part floors. This can be
demonstrated by comparing average availability
over the last decade with take-up by size band.
This shows that, despite a bias towards larger
units (43% are over 25,000 sq ft), transactions
below this size comprised 57% of take-up in
terms of floor space over the last decade. The
growth of serviced offices and incubator space
has also helped to provide for the needs of
smaller occupiers.
In 1994 availability totalled 7 million sq ft, of
which 4.9 million sq ft (69%) was Grade B/C
space. Today, Grade B/C supply accounts for
just 45%– equivalent to just over 2.7 million sq
ft. This is partly a result of ongoing refurbishment
or replacement with more efficient buildings, an
important and desirable feature of the City market.
It is difficult to determine whether there is sufficient
demand for the Grade B/C space that is in
decline, although recent trends in take-up suggest
that demand has been more focused on Grade A.
However, this does limit the choice for occupiers
seeking lower quality space or older buildings,
whether for reasons of economy or preference,
within the City office market, a theme explored
later in this report.
8
2000
Balance of existing supply
shows rising proportion of
Grade A
Current total availability in the City (EC1-4) is
estimated at 6 million sq ft. A slight majority
is of Grade A quality (offices of best quality
specification, floor plate efficiency and image;
55% or 3.3 million sq ft) with Grade B/C
accounting for just 45%. Total supply is below
the 10 year average level (6.5 million sq ft),
but perhaps more worryingly the proportion
and volume of Grade B/C supply has fallen
dramatically over the last 20 years.
City Offices
Getting the
Balance Right
1998
Figure 3: City (EC1-EC4) Supply by size band
sq ft (February 2014)
5%
Up to 6,000
6%
6,001 - 12,000
25%
10%
12,001 - 25,000
25,001 - 50,000
16%
Source: DTZ
15%
50,001 - 100,000
Over 100,000
Figure 4: City Supply v Demand by size band,
sq ft
2013 Take-up
17%
Up to 3,000
7%
13%
3,001 - 6,000
6,001 - 12,000
10%
18%
15%
12,001 - 25,000
25,001 - 50,000
50,000 - 100,
20%
Over 100,000
February 2014 Supply
6%
27%
Up to 3,000
8%
3,001 - 6,000
13%
6,001 - 12,000
12,001 - 25,000
25,001 - 50,000
14%
17%
15%
50,000 - 100,000
Over 100,000
Source: DTZ
As such, sheer size and/or height of a building
are not bars to multi-letting, and indeed in towers
this is positively encouraged. And some new
buildings, perhaps a greater number than before,
may be multi-let from the completion, rather than
moving away from a single original tenant through
assignment or subletting until expiry of the original
overriding lease. For example, a major current
development with floor plates of circa 25,000
sq ft, Land Securities’ 20 Fenchurch Street, has
largely been leased before completion (in 2014) to
12 tenants.
Actually, the extent of multi-letting does not
particularly vary with the age of the building.
Proprietary data on buildings over 20,000 sq ft
(equivalent to around 85% of City and Fringes
floor space examined by the Taking Stock report)
produced figures of 63% for the City Corporation
and 59% for the City Fringe. Nor does it vary
much by building size, although there were
differences between areas –the City of London
contained more multi-letting in buildings between
10-25,000 sq ft and those over 100,000 sq ft.
There is no evidence that multi-letting is
significantly less common in the City,
suggesting that it is meeting the demands of
smaller occupiers.
Future supply to continue trend
to larger buildings
Data on completions over recent years and
the future supply pipeline demonstrates a clear
tendency towards larger buildings. Of the space
currently under construction in EC1-4, 79% is over
100,000 sq ft, equivalent to half of all schemes.
According to a report from the British Council for
Offices (BCO), the ‘landmark factor’ of some tall
buildings plays a key role in attracting occupiers of
varying sizes. It found that fully serviced tall office
space is popular with both small and medium
sized occupiers. Contrary to what might be
expected, they were not shy of increased service
charges in tall buildings because of the better
quality infrastructure, front of house services, and
the building’s visibility and prestige which reflected
well on their image. The report also found that
some small and medium size tenants were
prepared to pay extra to be on a higher level within
a tall building3.
Figure 5: City (EC1-EC4): Current under
construction by size band (Sq ft)
17%
1%
3%
100,000 plus
50,000 - 99,999
25,000 - 49,999
79%
10,000 - 24,999
Source: JLL
Figure 6: City (EC1-EC4): Current under
construction by size band (no. of schemes)
11%
3%
100,000 plus
59%
36%
50,000 - 99,999
25,000 - 49,999
10,000 - 24,999
Source: JLL
The trend towards larger, more highly specified
buildings is partly a result of developers’
perceptions of the preferences of target occupiers.
At the same time, their ideal is a single occupier,
which increases the buildings marketability to
investors. The letting strategy for such schemes
BCO, Tall Office Buildings in
London
1
City Offices
Getting the
Balance Right
9
(small footplate tower buildings apart) tends to
focus on large mature organisations with firm
covenants and a willingness to pay relatively
higher rents.
In the City this has generally meant financial sector
occupiers – law firms, insurance companies and
media operators, as well as banks. Over the last
decade in Central London, 88 occupiers have
taken over 100,000 sq ft in 21m sq ft of newly
built or refurbished buildings, of which only 36
involved sole occupancy. So while this may be
the developers’ ideal, even in large, new buildings
multi-occupation is more common.
It is a measure of the City’s continuing importance
that 70% of this total (18.2m sq ft in all) have been
leased in EC1-4. The largest single tenant group
was from the financial sector (46%), but legal
(23%), insurance (11%) and TMT (11%) were
also important.
In office markets a renewed development cycle
is prompted by a change in the balance between
demand and supply in favour of the latter (i.e.
falling availability, increasing take-up, rising rents).
Developers know that the Central London market
has been extremely cyclical in the past, and that
profit depends on catching the wave of increasing
demand from occupiers, who have the confidence
to move and expand during periods of strong
economic growth. Developers move on projects
in response to market signals, which also give
investors the confidence to lend for
speculative schemes.
City Offices
Getting the
Balance Right
10
Occupier
migration
and sectoral
demand
Firm migration has led to the
‘survival of the fittest’ within the
City market – a competitive feature
which should be encouraged.
This market is dynamic and
accustomed to reinvention; the
sectoral mix changes over time as
occupiers come and go. Recently,
the level of demand from banks
and other financial firms has
weakened, while the TMT sector
has become more prominent. In
future, we expect that the influence
of technology will permeate all
sectors, making it more difficult
to categorise occupiers using
traditional sector definitions.
Occupier
migration
and sectoral
demand
Firm migration puts the City at
the cutting edge
The City is accustomed to reinvention. Constant
business migration exposes its landlords and
developers to the shifting demands of a dynamic
business base. Occupational sectors rise and
decline. One example of a rising sector is TMT,
which has produced an unplanned cluster in the
city fringe resulting from a complex of forces;
educational, technical and entrepreneurial, as well
as the rise of youth culture in East London. Here
it could be said that the occupier base found the
stock rather than the stock being provided to
attract particular occupiers.
The Firm Migration report observes that firms
in occupation have increased their per capita
value-added over the years, with those leaving
generally lower value-added than those remaining
– and particularly new arrivals. This form of natural
selection will be to the City’s advantage, and
those essential service industries that cannot
afford occupational costs can move to cheaper
premises that are increasingly provided on the
periphery. If the cost of operating from the City
rises, then businesses will either move to a
cheaper location or take the view that the benefits
of remaining within London – in terms of increased
opportunities and profit – outweigh the extra
outgoings. It is worth noting that the City is not the
most expensive place to locate within the capital.
While the current image of the City as a financial
centre par excellence has been entirely justifiable
since the second world war, its profile has not
remained unchanged. Even within the financial
sector itself there have been major changes over
the period – the ‘Big Bang’ which abolished many
City Offices
Getting the
Balance Right
13
Firm migration has helped in
re-balancing the economy away
from a reliance on Finance by
building strength in the TMT and
Professional service clusters
(The Effect of Firm Migration 2013)
Hedge funds have largely moved to the West End,
with a few notable exceptions, demonstrating
that clusters do break up and relocate. The
prime historical example in the City is advertising,
which is now beginning to return. Up until the
Second World War, they were concentrated in
EC4, around the newspaper industry, but as
broadcasting became a more important source of
income, they moved to the West End.
Now, some are moving back to the City. Recent
examples are notably: Hachette acquiring the
entire 135,000sq ft at Carmelite Riverside, EC4;
Publicis taking 59,000 sq ft at The Turnmill, EC1;
and Saatchi & Saatchi at 43 Chancery Lane, WC2.
The latter is in Mid Town, but very close to the
City. While the general push factors from the West
End, notably the high rental levels, were important,
a pull factor is the shift in the centre of gravity of
the new ‘digital culture’ toward Mid Town and the
North City Fringe.
Growth of serviced office
providers
The number of businesses in
serviced premises has risen
significantly over the last
decade. The number of tenants
in a sample of premises has
increased from nearly 700 in
2003, to almost 2,400 firms
in 2012
City Offices
Getting the
Balance Right
14
(The Effect of Firm Migration 2013)
The Firm Migration report observes a significant
increase in the number of serviced office
providers. This trend has been particularly acute
in the five years following the financial crisis,
emphasising the increasing demand for flexible
short term office space. Between 2008 and 2012
we have observed a near doubling of the number
of serviced office centres in Central London. This
trend continued in 2013 with an additional 12
opening in the City.
Figure 7: Number of Central London serviced
office locations
300
No of serviced office locations
of the restrictive practices of the old City and laid
the groundwork for its expansion; the emergence
of a very large, generally foreign-owned banks;
the consolidation and emergence of a few very
large law firms (the ‘Magic Circle’); and the rise
to prominence of new entities, private equity
companies and hedge funds.
266
250
200
150
131
100
50
5
0
1997
2008
2012
Source: JLL
Alongside the increase in traditional serviced
office space, ‘business incubator space’ providing
access to other services, including community
events, as well as access to capital and business
mentors, has become popular. Office space
is often subsidised by larger organisations
and investors in order to gain early access to
innovative start-ups and their ideas. This type of
space is particularly popular among digital media,
digital commerce and tech/creative entrepreneurs.
Trends in sectoral demand
The research identified four key clusters operating
within and adjacent to the City: Finance,
Insurance, Professional and Telecommunications,
Media & Technology (TMT) (The Impact of Firm
Migration 2013).
Finance the key driver of City demand
The financial sector remains the key occupational
driver of the City, although its importance has
diminished somewhat in recent years. The Taking
Stock report found that it occupied 49% of total
floor space – significantly higher than the average
share of take-up over the past decade (32%).
During the five years since the financial crisis
(2009-2013) demand fell as occupiers chose
either to remain in their existing premises or to
reduce their head counts and consolidate their
office space requirements. Over 2012 and 2013,
its share was at a particularly low ebb, at 17% and
21% respectively.
The underlying dynamic has been a weakening
of transactional activity by the major banks. In
2011 and 2012 banks took around 80% less floor
space than the long term average. They sub-let
offices in Canary Wharf and put construction
starts on hold; most notably JP Morgan’s decision
to occupy Lehman’s building instead of developing
a new headquarters in Canary Wharf. This can be
directly related to the pressures the major banks
are under in terms of litigation and government
regulation, notably capital requirements. Despite
avoiding the more extreme measures that were
proposed (break-up, ban on own account trading,
etc.) banks’ view of the foreseeable future, at least
in Europe, is not expansive. Rationalisation,
rather than expansion, seems likely to be the
guiding principal.
The results of the mid 2013 London Employment
Survey carried out by CityUK are revealing,
albeit in a Central London rather than a purely
City context. Since 2007 banking has registered
a net 1.7% increase, while numbers in fund
management have fallen back by 3.4%. Other/
auxiliary financial services (various supporting
activities, exchanges, and trade associations),
have seen an increase of 4.3%. Stability in
banking employment probably obscures a fall in
wholesale banking activity and a more positive
picture within retail banking. And while hedge fund
activity has been muted, private equity has been
buoyant, as has wealth management – although
companies in these two sectors are located in the
West End as well as in the City.
Figure 8: Take-up in EC1-4 by Business
Sector 2004-2013
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2004
2005
2006
2007
2008
2009
2010
Finance
Insurance
TMT
Legal
Other professional
Other
2011
2012
2013 2004-13
outperformed the wider market. TMT take-up in
the City has increased markedly, reaching a recent
high of 1m sq ft in 2013. During the 2004-2009
period, it provided between 7 to 9% of take-up
– but then doubled its share 2010 and continued
to rise, reaching nearly a quarter of all take-up in
2013. In 2013 TMT companies accounted for the
largest proportion (23%) of City take-up, followed
by other Professionals (excluding legal) and
Financial occupiers (18%).
TMT demand is more diverse than financial
demand, comprising a broad range of occupiers
including advertising, publishing, software and
telecoms and creative industries in general. And
the ‘digital’ Tech City population in the Northern
Fringe is closely related to financial and business
services as well as London’s creative, media,
advertising and marketing industries; indeed the
boundaries are not distinct. As a result, TMT
occupational requirements vary widely in size,
location, quality and building type, and a number
of London locations have attracted clusters with
different mixes of specialisms.
Although TMT occupiers are reasonably footloose,
they are relatively rent-sensitive. Rents are typically
less than £55 per sq ft and often fall into the £35£45 range. Exceptions exist, notably Telefonica
(O2) who acquired 51,000 sq ft at AirW1 in Soho,
paying a rent of £80 per sq ft in 2012.
TMT companies have for some time accounted
for around a third of active requirements in the
City (currently 40% versus 35% for the West
End). However, in many cases, it is competing for
take-up with other Central London sub-markets.
The established West End locations will continue
to attract TMT occupiers, although the strong
rental growth and lack of supply in key locations
may force some to widen their search area. Fringe
locations including King’s Cross and Southwark
will continue to be major beneficiaries of the higher
level of demand, a result of lower occupancy
costs relative to the core markets, the early 2013
Google deal at King’s Cross being a major case
in point.
Source: DTZ
The rise of TMT and ‘Tech City’
Since the recession, the major new feature has
been the greater share of space taken by TMT
(technology, media and telecommunications)
companies. This sector has proved resilient
to the recent economic uncertainty and has
City Offices
Getting the
Balance Right
15
Figure 9: City TMT take-up
1,000
25%
900
800
20%
000s sq ft
700
600
500
15%
400
300
10%
200
100
0
2003
2004
TMT (lhs)
2005
2006
2007
2008
2009
TMT % of total take-up (rhs)
2010
2011
2012
2013
5%
Average
Source: DTZ
The ‘Tech City’ dimension of the TMT sector
is a critical one, even if it does not represent
as significant a share of take-up as might be
widely believed. It was established because of
the attraction of low commercial costs following
on from the initial success of Clerkenwell, which
became more expensive in the early 2000s. Then
activity extended to Hoxton and Shoreditch.
Nathan et al4 observe that ‘Being located in Inner
East London has a number of advantages for
firms: cheap rents, accessibility to the rest of
London, proximity to like-minded firms, amenities
and ‘vibe’, and this ‘is highly attractive to the type
of staff that digital businesses want to secure and
retain’. But there are concerns that rising rents
may disrupt the cluster, a concern that the Taking
Stock report also refers to.
One view of the potential evolution of Tech City
is that it is an incubator of UK digital businesses,
which, as well as being important to the future
of the UK and London economy, could mature
into the occupation of larger and better quality
facilities. However, it is entirely possible that
many will want inexpensive, low specification
accommodation. As we suggest below, however,
if the core neighbourhoods of the current Tech
City become more expensive (the inevitable
paradox of success) there are areas further east
which could provide similar stock.
Nathan et al – A Tale of
Tech City, Centre for London,
2012.
4
City Offices
Getting the
Balance Right
16
The City Fringe offers a much more diverse set of
uses than the City core. There are large numbers
of independent retailers, bars and hotels. Together
with a reputation for cutting-edge music and
fashion, this gives the area an attraction for young
businesses and workers that is very different
from the City Core. This is not just superficial’;
the ‘creative tech’ companies here thrive off the
spill-over effects from youth culture. Residential
has played a role, although it seems unlikely that
many of those working in the area can afford
to live locally – the proximity of more affordable
neighbourhoods in Hackney and Tower Hamlets
is probably more important. Anecdotally, cycling
appears to be very popular among the workforce
here. On the other hand, there is evidence that the
leisure offering is becoming more mainstream and
this is eroding the area’s authenticity.
In order to appreciate the full extent of TMT activity
we have looked at an extended definition of the
City Fringe, including the WC1, N1, EC1, EC2N,
EC3N postcodes and the eastern side of E1 next
to the City. These are mostly (with the exception
of EC1) outside the City of London. This accords
with Nathan et al’s positioning of Tech City in
‘Inner East London’, which from an international
perspective is ‘an inner-urban hotspot in a
global city. From a local perspective, it is one of
several digital economy zones in the capital, and
the eastern end of a high-tech corridor running
through the centre.’
Slightly larger than the area surveyed by the Taking
Stock report the area has the same characteristics
of smaller floor plates and proportionately older
stock, some light industrial or warehousing. The
stock totals 37m sq ft. Turnover of occupant
is lower than in the core: over the last 10 years
19m sq ft has been leased, equivalent to just
over half of the stock. By comparison, in the City
proper over the last decade the turnover has been
somewhat higher, at 60%.
The occupier base is as varied as the City,
but dominated by three sectors; TMT (24%),
Finance (19%) and Legal (14%). TMT and Other
Professional take-up activity has been especially
strong in the last five years. The quality of space
taken up by the TMT sector in the City Fringe is in
line with the wide picture.
Insurance a steady and constant element
The City’s insurance market is the least affected
by inward and outward migration, largely a result
of the sector’s continued preference for face
trading (over screen trading) and the position of
Lloyds in the east of the City. This will not change
in the foreseeable future with a number of large
Insurance companies recently committing to new
leases in the Leadenhall Building, EC3 and 20
Fenchurch Street, EC3 and WR Berkley
planning to develop a new headquarters on
Lime Street, EC3.
The insurance market is a steady and constant
element in the City’s business structure. While
business activity levels, as measured by
premiums, have risen from £25bn in 2001 to
£42bn in 2011, direct insurance employment in
the London market has remained fairly steady at
35,000. However, estimates rise to 50,000 once
associated businesses such as loss adjusters,
actuaries and support staff is included. In the
London market M&A activity has been increasing,
a trend that will continue, particularly among
intermediaries (brokers, managing agents, etc.)
and other service companies.
This has been reflected in rising take-up. Similar
to the financial sector as a whole (albeit driven
by different factors), insurance take-up is
cyclical. In 2012 leasing activity was elevated,
representing 22% of the total, although this fell
back to 12% in 2013. Over the past decade
93% of insurance take-up has been within the
City, where it accounted for 12% of the total. The
raised level of leasing activity reflected a mixture of
drivers; lease events, expansion, and acquisition
of more prestigious premises/existing building
obsolescence (examples include JLT, Miller, Kiln
and Gallagher Heath). At the same time the sector
has ‘raised the bar’ in terms of self-image, and is
consequently looking for higher quality premises.
of leasing activity, while take-up in the West End
and Midtown has fallen, by low supply and strong
rental growth.
The other professional sector currently accounts
for 20% of active requirements in the City; the
second most active sector after TMT. As with that
sector, many of these requirements are footloose,
although the City is well placed to attract a
significant share of this demand. Low supply in the
West End and Midtown has led to an increasing
divergence between City and West End rents,
making the former increasingly attractive to cost
sensitive occupiers.
The London market will remain in the City.
Recent take-up at 20 Fenchurch Street and The
Leadenhall Building, plus WR Berkley’s impending
development, partly owner- occupied, in Lime
Street underlines this. But with employment levels
unlikely to change very much, and occupiers
using floor space more efficiently, its occupational
footprint will not change significantly. Nevertheless,
increasing premiums, stable employment and
fewer firms (as noted in the Firm Migration report)
allow us to deduce rising added value. This
suggests that the insurance industry will be able
to absorb the additional costs of remaining within
the City.
London’s global connection drives strong
growth in professional services
We define the Other Professional sector as
including a diverse range of businesses, including
recruitment, accountants, education, management
consultants, and public relations, but excluding
the Legal sector. In the City, this sector is in
part driven by its association with activity of the
financial sector. But, as in Central London as a
whole, the internationally traded aspect of activity
(consultancy services of one form or another) has
grown and constitutes an autonomous source
of business growth. As with other sectors, other
professional take-up was subdued post 2007, but
recovered from 2010, averaging 750,000 sq ft per
annum over 2011-13, a 20% market share, vying
for first place with finance and TMT (both 21%).
Historically the City has accounted for around
30% of other professional take-up, with the
West End and Midtown taking similar shares.
More recently (2008-2012), the City and fringe
markets have accounted for a larger proportion
City Offices
Getting the
Balance Right
17
City Offices
Getting the
Balance Right
18
Central
London market
perspective –
opportunities
and challenges
for the City
London has seen extremely strong
levels of economic and population
growth over recent years, a trend
that will continue. Central London’s
ascendency is mainly being driven
by the related forces of population
growth, migration, and London’s
unrivalled global connections.
Not only are London’s output,
population and employment
growing, the demographics are
extremely favourable, with a
growing young, skilled workforce.
This presents a huge opportunity
for the City to cement its
reputation as the leading centre for
international business.
Central
London market
perspective –
opportunities
and challenges
for the City
The City needs to compete with other locations
within London to attract occupiers. Transport
improvements are expanding Central London’s
boundaries, occupiers are becoming more
footloose, and many no longer view the traditional
City or West End office markets as their default
choice. The City already faces competition from
other locations in Central London, such as King’s
Cross, Southbank, Victoria and Canary Wharf.
In future, this competition will only become more
intense, with office development likely to proceed
or expand in the likes of Waterloo, Battersea,
Royal Docks and Stratford. Current demand
for space is strong, and the City benefits from
being relatively affordable, which has encouraged
some migration from the West End. However, it
cannot be assumed that occupiers will always
automatically select the City above other locations.
City Offices
Getting the
Balance Right
21
Table 1: Summary of opportunities and challenges for the City
Opportunity
Challenge
London economy outperforming UK
City is competing to attract occupiers with
established and emerging sub-markets
London is one of small number of pre-eminent
established global centres where major service
companies require a presence
Restricted development pipeline will affect City’s
ability to accommodate current high level of
active demand
City occupier costs are competitive relative to
other London sub-markets and global cities
Tightening spread of rents across Central London
will erode City’s current advantage through
completive occupier costs
Opportunity & Challenge
Increasingly footloose occupiers
Infrastructure improvements
Population growth and urbanisation are likely to
continue. Reduced net migration outflows since
the economic crisis combined with the high birth
rate to give a trend led growth of around 90,000
per annum to 2013, which means the population
of greater London is expected to reach nine million
by 2020.
London has driven the UK’s recovery since
the crisis, leading on measures such as labour
productivity, business start-up rates and falls in
unemployment and this is expected to continue.
Indeed, London is by far the most economically
productive part of the UK, the capital’s share of
national output has been on a steadily rising trend
since 2006, reaching 22.4% in 2012.
City Offices
Getting the
Balance Right
22
0%
3.7%
1.5%
2.6%
1.4%
0.8%
2012
3%
3.4%
3.2%
2.4%
3.1%
3.3%
1.95%
-0.4%
1%
-0.6%
2%
1.9%
3%
2.6%
3.5%
2.8%
4%
1.2%
In the aftermath of the recession, the contrast
between the performance of London and the
rest of the UK has reasserted itself in a powerful
manner. This enhanced position of London is
being driven by the related forces of population
growth, migration, urbanisation and its unrivalled
global connections, which include a positive global
perception of the city and its capability to attract
foreign investment.
Figure 10: Greater London GDP growth
0.3%
Outlook for continued growth
of the Central London office
market
2013
2014
2015
2016
-1%
Greater London
UK
US
Eurozone
Source: JLL, Oxford Economics
London’s demographics are also favourable – the
workforce is young (almost one-in-three of the
UK’s 20 to 30 year olds that relocated between
2009 and 2012 moved to London) and skilled
(a November 2013 survey published by Deloitte
found that more people are employed in highskilled, knowledge-based sectors in London than
any other city in the world).
London retains its fundamental strength as a
global financial centre. London’s was rated first in
the Global Financial Centres Index (GFCI) 2014
– not only does it have broad and deep financial
services activities, but it is connected with many
other significant financial centres. London comes
in the top three of all five of the GFCI’s Industry
Sector Sub-Indices. It comes third for banking,
second for investment management, and its
governance and regulations, insurance industry
and professional services sector are ranked as the
best in the world. In the GFCI’s competiveness
indices - namely those assessing human
capital, business environment, financial sector
development, infrastructure and reputational
factors - London is also ranked number one.
Competing London locations
figure 12 shows that the City has over 10 m
sq ft of potential development in the pipeline.
But the existing high density of office buildings
precludes the kind of windfall additions which
these peripheral locations can secure, while these
new locations have the advantage of starting from
scratch in terms of place making. This does not
preclude the City responding to these challenges,
as we further consider below. Getting the balance
right between uses is critical to maintaining its
current attractiveness as a business location.
As Central London becomes increasingly
attractive to organisations as a global business
location, emerging business districts are being
developed to accommodate the ensuing rise
in demand for office space. The volume of
Central London stock is rising; between 2003
and 2013 total stock increased 9%. The City’s
stock has increased during this time period,
but it is the emerging sub-markets which have
seen the greatest proportional rise in new office
space. King’s Cross and Paddington have been
developed as office locations as an overflow
to the West End market, while Southbank and
Docklands have accommodated occupiers that
might otherwise have located in the City.
Figure 12: Central London development
pipeline by sub-market 2014 – 2018
Hammersmith
Paddington
Southbank
Midtown
But, as we show below, the latter has been
able to retain its existing occupier base more
successfully than other core markets. It should be
noted the distinction between City and West End
occupiers is now less distinct than it once was
and many active requirements now have Central
London wide searches (see section 5.5). As a
result, central London is becoming increasingly
polycentric with many areas previously described
as ‘fringe’ now established locations in their
own right.
million sq ft
Figure 11: Central London Stock 2003 – 2013
100
40%
90
35%
80
30%
70
25%
60
20%
50
15%
40
10%
30
on
gt
on
st
Fr
s/
Eu
ng
s
C
ro
s
ity
Pa
dd
in
ge
in
Fr
in
C
st
West End
Stratford
Docklands
City
0
2
Speculative
4
6
8
Requires pre-let
1
12
million sq ft
Source: JLL
Although the City is in competition to attract
occupiers, it should not be viewed in isolation
from other central London sub-markets, rather
as a leading component of the Central London
occupier market. Indeed, neighbouring submarkets compliment it, with some occupiers
locating in Southwark and Canary Wharf as these
allow easy access to the City. These areas also
allow City occupiers to locate back office functions
in areas with lower occupier costs, although this is
likely to change with the recent tightening spread
of rents across Central London. And looking at
the wider context, as long as the overall economy
grows, the competition for occupiers will not
resemble a zero-sum game.
Ki
Growth (rhs)
Ea
W
es
t
En
d
nd
s
Do
ck
la
ar
ity
C
th
w
So
u
To
w
M
id
tE
W
es
Stock (lhs)
ge
-5%
k
0%
0
n
5%
10
nd
20
King’s Cross/Euston
Source: DTZ, JLL
The City faces increasing competition to attract
new occupiers and retain existing occupiers,
particularly those with large floor-space
requirements who currently have limited options
due to the restricted development pipeline (section
5.6). This will benefit emerging sub-markets,
including King’s Cross and Stratford which have
large deliverable pre-let sites, as well as Canary
Wharf which has significant scope for expansion
through the Wood Wharf scheme. The City still
has significant scope to increase the size of its
stock (the policy framework in the Local Plan
expects over 7.5 m sq ft of additional space to
be delivered between now and 2026), indeed
Competitive occupier costs
relative to other London
locations
Part of the City’s success has been its increasingly
good value in rental terms, especially in term of
building stock on offer, compared to other Central
London locations. City rents (excluding the small
floor plate tower buildings which often command
premium prices) had remained at £55 per sq ft
since Q1 2011, and have only just started to rise
again (at end 2013 they were £57.50-£60.00 per
sq ft for prime offices).
City Offices
Getting the
Balance Right
23
Figure 13: Central London prime rents map
West End rents for the different sub-markets
(Soho, North Oxford Street etc) as at end 2013
were between £60-£80 per sq ft, with top rents
in Mayfair and St James’s (excluding the very
exclusive deals on top floors and small floor
plates) at £102.50 per sq ft. On the West End
Fringe rents in Paddington and King’s Cross are
on a par with the City, at £57.50 per sq ft.
Figure 14: Prime Rental Growth and Current
Rent Level for Central London Sub-Markets
120
350%
100
300%
250%
£ sq ft
80
200%
60
Source: JLL
shown faster growth than the City. The major
exception has been Southwark, which has risen
300% since 1993, from £12.50 to £50 per sq ft,
although most of this growth took place in
the 1990s.
Looking at effective rents, which are prime rents
discounted to take account of standard rent free
periods offered on new leases, we find that over
the last 10-20 years prime West End rents have
outstripped those in the City (234% growth to
118%). This was due to faster nominal growth
combined with lower inducement levels. This
trend, by implication, extended to Midtown as
well, as the latter’s performance has until recently
closely mirrored the City.
150%
40
100%
k
rf
ar
ha
W
hw
y
ut
ar
an
C
So
rn
ia
or
e
C
bo
ol
ity
H
C
St
ra
or
Vi
ct
ar
de
So
tG
en
ov
C
St
N
or
th
of
nd
0%
n
0
ho
50%
M
Ja ay
m fai
e r/
O
xf s's
or
d
St
re
Kn
et
ig
ht
sb
rid
ge
20
End 2013
10 year rental growth (rhs)
20 years rental growth (%)
Source: DTZ
City Offices
Getting the
Balance Right
24
Over the last 20 years rental growth, as measured
by prime rents, has been far stronger in the West
End than the City and Mid-Town (this has until
fairly recently had a similar performance as the
City). This pattern has been mirrored by sub
market growth; most West End ‘villages’ have
The City is also competing for occupiers with other
major global cities due to its position as one of a
small number of pre-eminent established centres
where major international service companies
require a presence. This is demonstrated by a
comparison of occupational costs (rents, property
tax and service charges) in the City with other
major competitive centres (including the West End)
using DTZ’s Global Office Costs of Occupation
publication, which compares these costs on the
basis of best local practice in terms of floor space
per workstation (the UK’s current benchmark is
107 sq ft/10 sq m). Here we find that in terms of
occupational cost the City is currently third highest
(in current dollar exchange rate terms, $15,070)
behind Hong Kong and the West End ($21,600
and $19,500 respectively). Looking forward five
years, our forecasts for global city prime rents
suggest that cost in the City will remain in third
place behind Hong Kong and the West End – i.e.
it will become more expensive but its international
ranking will not change. This will, other things
being equal, support its competitive position.
Figure 15: Annual occupier cost per
workstation by city
$35,000
$30,000
$25,000
$20,000
$15,000
companies, all non-TMT, two moved from Mid
Town to the City, and one from the City to Canary
Wharf. Of the 12 companies which were based
in the City and took over 50,000 sq ft in 2013, 11
chose locations within the City.
This suggests that major companies in the City
tend to remain there, although TMT occupiers
appear to be the most footloose. The other feature
is that West End occupiers are a disproportionate
source of new entrants into other markets. This
last feature of the contemporary Central London
office market stems from rental growth in a
market where supply is restricted, and the ability
to produce large new buildings is constrained by
planning considerations. In addition development
pressures from the residential sector is competing
for sites and putting pressure on site values.
$10,000
$5,000
$0
2008
2013
2018
London West End
Hong Kong
London City
Tokyo
Frankfurt
New York
Singapore
Shanghai
Paris
Source: DTZ
Increasingly footloose
occupiers
Occupiers are increasingly agnostic regarding
location, and are driven more by the quality of
supply, a productivity agenda and the need to
attract and retain staff who are looking for amenity
and a sense of place (section 6). The profile
of occupiers with City office requirements has
become increasingly diverse.
Tenant movement has tended historically to
be from the core markets to the fringe. In the
City large successful companies, from both the
financial, professional and legal sectors, have
moved to Canary Wharf and Southwark. But this
trend, most closely associated with pre-letting,
has resulted in little movement between the major
markets, despite the increasing difference in rents.
However, recent evidence suggests this situation
may be changing. If we look at transactions
of over 50,000 sq ft (a third of total take-up)
in 2013, we see that 14 moved within their
existing market (11 of these in the City), and 15
moved between markets (two of these lettings
were from companies new to Central London,
including Amazon), and two were multi-location
consolidations. Of the 15 which moved, 10 were
from the TMT sector, of whom six moved from the
West End (two to the City, two to King’s Cross,
two to Mid Town and Euston). Of the remaining
This last feature is endorsed by DTZ’s current
Central London active requirements (named
companies with appointed advisors actively
looking for space) when companies’ current
locations are compared with the locations they
are considering. While in the City 60% of
applicants are looking in EC1-4 as well as
elsewhere, only 25% of West End occupiers
include their current market location in their search
criteria. Of the 10 companies known to be looking
to move into Central London from outside only
three are looking in the West End; seven are
looking in the City Fringes.
Of media companies (33 totalling up to 3.3m sq ft)
only two out of 12 originating in the West End and
its Fringes are looking within their current market
locations. In contrast 5 out of 9 TMT companies
based in the City which are looking for space are
looking within it. In short, the TMT sector in the
West End and fringes is increasingly looking to
move east, with the City a beneficiary of
this movement.
Infrastructure improvements
Another factor in play which will affect the City’s
position in Central London is infrastructure
improvements. Crossrail, and to a lesser extent
the Thameslink expansion, presents both an
opportunity and challenge to its office market. But
while the City will continue to be the first choice
for its own and new occupiers, who will benefit
from transport re-enforcements, this improved
connectivity will open up new locations for
commercial development.
City Offices
Getting the
Balance Right
25
Table 2: Transactions over 50,000 sq ft in Central London during 2013
Company
Business sector
Space taken
(sq ft)
Original location
New location
Amazon
TMT
212,712
Outside London
City
Amlin
Insurance
111,808
City
City
Bird & Bird
Legal
139,878
City
City
Canadian
Government
Government
69,125
West End
West End
Capita
Corporate
103,656
Various
(consolidation)
City
CMS Cameron
McKenna
Legal
140,188
City
City
Debevoise &
Plimpton
Legal
51,618
City
City
Facebook
TMT
87,719
West End
NW1
Field Fisher
Waterhouse
Legal
81,723
City
City
FTI Consulting
Other
Professionals
80,989
Mid Town
City
Genesis Oil
Corporate
55,128
Mid Town
City
Google
TMT
800,000
West End
King’s Cross
Government
Agencies
Government
74,368
Various
(consolidation)
Mid Town
Hachette UK
TMT
133,978
West End
City
HSBC
Finance
54,224
Canary Wharf
Canary Wharf
KPMG
Other Professional
205,341
City
Canary Wharf
Liberty Mutual
Insurance
Insurance
51,015
City
City
Liberty Syndicates
Insurance
66,321
City
City
Business &
Finance
Other
59,267
New branch
City
Mitsui
Finance
51,456
City
City
News International
TMT
430,167
City Fringe
Southwark
Ogilvy & Mather
TMT
227,551
Canary Wharf
Southwark
Partnership
Assurance
Insurance
50,693
City
City
PRS for Music
TMT
51,800
West End
King’s Cross
Publicis Groupe
TMT
58,847
West End
City
Saatchi & Saatchi
TMT
96,457
West End
Mid Town
Schlumberger
Corporate
63,831
West End
West End
Schroders Plc
Finance
310,000
City
City
Serviced Office
Group
Other
50,331
New branch
City
University of
Liverpool
Other
74,379
City
City
World Pay
TMT
92,429
City Fringe
City
London School of
City Offices
Getting the
Balance Right
26
Source: DTZ
Crossrail will, for the first time, create a direct eastwest link between all of London’s main business
locations, linking the West End, the City and
Canary Wharf with Heathrow airport in the west.
It will improve the City’s connectivity with stations
in Liverpool Street, Whitechapel and Farringdon,
thus increasing the attractiveness of these areas
for office investors, developers and occupiers. The
area surrounding Liverpool Street station is already
an established office location but Whitechapel
and, in particular, Farringdon, have scope to
accommodate further office stock.
Crossrail will improve the connectivity of Stratford,
increasing its viability as an office location putting
it in direct competition with the City and other
Central London sub-markets. It will also further
improve the connectivity of Docklands, particularly
the links between Canary Wharf and the West
End. These areas combined can accommodate
around 10 million sq ft of new stock, between
2014 and 2018.
The substantial upgrading of Thameslink capacity,
in conjunction with the creation of a new transport
hub at Farringdon with Crossrail, will also provide
an opportunity for the City at its less intensively
developed western end.
This eastward movement in commercial and
residential activity which we earlier observed was
inaugurated by Canary Wharf, and made possible
by transportation improvements (crucially the
promise of the Jubilee line extension). But another
infrastructure revolution, actually and potentially
as far reaching, is now taking place. This is the
conversion of Inner London, and now perhaps
extending to Outer London, of railway lines to
management by Transport for London. The
change in control has imparted a dynamic which
is increasing access across and around Inner
London, not just between the centre and
the suburbs.
In terms of the built environment the most obvious
impact is on the residential sector, facilitating
access to Central London from the east. One of
the underpinnings of Tech City is that it is on ‘the
right side’ of central London to access cheaper
residential areas, a plus for a largely youthful
workforce. But the increased accessibility of Inner
East London provides for the extension of Tech
City into lower quality commercial properties
in EC2 (Hackney) and E1 (Aldgate/Hackney/
Fringe EC3). These areas have been explicitly
recognised by the local authorities concerned,
and protected from residential conversion.
There is also substantial industrial stock, much
of it redundant, in those areas as well, some
suitable for conversion to office space, albeit of
an unconventional kind. The point is that there
is capacity to relieve whatever pressure occurs
on second-hand City fringe space that occurs.
Bearing in mind that residential development
there will be controlled, to the extent that local
authorities are bent on retaining employment uses.
Forward planning as represented by the 2010
Mayor’s Transport Strategy (to 2013) proposes an
increase of more than 50% in the average number
of jobs that a London resident can reach within
45 minutes minimum public transport journey
time. Growth in jobs will be stronger in East
London. The foregoing suggests that transport
improvements will provide the improved access
required for a growing residential population to
find work in the growth area of East London.
This will provide the access for currently
underused commercial premises in Inner
Figure 16: Map of Crossrail and Thameslink routes in Central London
Crossrail
Source: DTZ
Thameslink
City Offices
Getting the
Balance Right
27
East London to act as a reservoir of cheaper
accommodation for lower cost businesses
in Central London in general, and the City in
particular.
Figure 17: City development pipeline
2014-2018
6
4
3
2
Looking at the schemes currently under
construction in the City Corporation area, plus
those with or without planning permission, which
could commence over the five-year period, the
total could be as high as 12.3m sq ft across 55
schemes. This includes possible starts as well as
‘committed’ or ‘probable’ projects. This, taking
account of the loss of stock in demolished and
refurbished buildings, would provide an additional
5.6m sq ft. The equivalent wider City and Fringe
(EC1-4, E1 and SE1) total would be 15.6m sq ft,
providing an additional 6m sq ft.
City development completions have been below
average for the previous three years. Despite this,
supply has not fallen significantly, largely owing to
the subdued take-up over the same time period
as well as the recent uptick in pre-leasing which
does not affect current supply. The volume of
development completions will recover in 2014,
with circa 5m sq ft currently under construction,
however a significant proportion (41%) of this
space has already been let, a figure that is likely
to rise before reach practical completion. From
2015 onwards the speculative development
pipeline is severely limited. The level of committed
speculative deliveries is below average in 2015
and 2016 and very little has been committed for
delivery thereafter. The majority of development
schemes (76%) that could potentially deliver
between 2015 and 2017 currently require a
pre-let.
City Offices
Getting the
Balance Right
28
Speculative
Pre-let/Owner occupier
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
Development volumes can be projected over the
next five years with a degree of certainty given our
knowledge of the pipeline. This is largely because
the pattern of lease events which control the
occurrence of vacant possession is fairly clear.
Combining this with an understanding of the
state of the buildings where leases are scheduled
to fall in provides an understanding of when the
precondition for comprehensive development
(vacant possession) is likely to occur.
2000
1
1999
Limited development
pipeline in the City over the
next few years
million sq ft
5
Requires pre-let
10 year average
Source: JLL
As we have shown above the supply of newly built
or refurbished stock in the City is beginning to
show a shortage in the face of growing demand.
If this continues, it will not be because there
are insufficient sites to meet this demand. It will
be because developers are not yet confidant
enough to implement schemes, or are unable to
secure finance, whether borrowed or equity, for
speculative schemes.
Forecasting
required
City office
stock
Office-based employment in the
City will continue to expand –
although not as quickly as in some
emerging locations outside the
traditional core. The City will not
become less important as long as
it continues to provide a superior
offer, underlining the importance
of providing suitable new stock,
or at the very least, a continual
upgrading of existing stock. As has
happened in the past, we see no
reason why it will not be able to
renew and expand its office stock
to meet future challenges, even if
a more constrained development
finance market results in more
pre-letting.
Forecasting
required
City office
stock
Employment outlook
stronger in the fringes
than core City
This section looks at the prospects for officebased employment growth over the next decade.
This provides the basis for our expectations
for the necessary quantum of stock to add to
existing office floor space in the City in order to
meet expected demand. Initially we look at Inner
London5 office-based employment growth, as this
provides the basis of observing the City’s share
in this growth. We vary this with two economic
scenarios, an upside and downside variant, the
latter predicated on slower growth consequent
on continuing deflation in Europe and the reemergence of problems with debt. The City’s
share of employment in these forecasts (based
on the City of London itself) is not meant to be a
definitive indicator of its competitive position, but
will provide a starting point for considering the
opportunities and challenges of the next decade.
Looking forward, Oxford Economics expects
employment in Inner London to grow more
strongly than the City, especially in the second
half of the decade. City office employment is
currently estimated at 315,000, expanding to
357,000 at the decade’s end. This suggests that
office employment growth will be stronger at the
periphery of Central London than at the Centre.
This is not really surprising. These core markets of
Central London are already heavily developed, and
increases to capacity are incremental. Other uses:
retail, residential, leisure compete with offices.
Locations outside the centre have the capacity
for windfall sites which have, and continue to
have, a significant positive impact on the capacity
for office employment. A fall in the proportion of
Predominantly Central
London, but also peripheral
locations with employment
growth such as Tower
Hamlets and Hackney.
5
City Offices
Getting the
Balance Right
31
Central London’s business stock located in the
City is a likely outcome of this, although for the last
20 years redevelopment has kept the wider City
(EC1-4) in broadly the same place as regards the
relative size of its office floor space capacity.
the decade’s end). Employment in finance and
insurance employment stagnates in the rest of
Inner London however, suggesting that the City’s
pre-eminence as the capital’s financial centre
will remain.
Figure 18: Office-based employment growth
in Inner London and the City of London
The fastest growing employment sector is
professional scientific and technical, which is
forecast to grow by 25% (28% in Inner London).
This sector will benefit from the growth in
internationally traded professional services,
but also contains important elements of TMT
employment, which will also be buoyant. The
support business service category, administration
and support, is also expected to grow strongly.
2,000
1,800
1,600
000s
1,400
1,200
1,000
800
600
400
200
0
1993
1998
Inner London
2003
2008
2013
2018
2023
City of London
Figure 20: Office-based employment growth
forecasts by business sector, City of London
400
Source: DTZ, Oxford Economics
350
Figure19: Office-based employment growth
by business sector for Inner London and the
City of London
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Inner
London
City
Inner
London
1993
City
2003
Inner
London
City
Inner
London
2013
City
2023
Financial and insurance activities
Professional, scientific and technical
Information and communication
Administrative and support activities
Real estate activities
Public administration
Source: DTZ, Oxford Economics
City Offices
Getting the
Balance Right
32
Turning to growth by business sector, employment
in finance and insurance has been falling as a
share of the total for at least 20 years, although
this is expected to stabilise, with a small increment
to absolute size (current employment in the
sector is 160,000, expanding 6%, to 169,000 at
000s
300
However, the capacity for growth in other locations
within Central London does not necessarily
detract from the City’s position. Indeed, it can
be argued that the general expansion of Central
London office-based employment will be to
the City’s benefit, encouraging the growth and
development of businesses willing and able, as
illustrated in the Firm Migration report, to migrate
up the value chain and move into the City proper.
Thus, even if employment grows relatively slowly,
the City will succeed if it retains and attracts the
most successful businesses.
250
200
150
100
50
0
1993
2003
2013
2023
Downside
Information and communication
Financial and insurance
Real estate activities
Professional, scientific and technical
Administrative and support
Public administration and defence
Source: DTZ, Oxford Economics
Inner London employment growth will grow
faster than the UK whatever the scenario, and
as mentioned above employment growth is
concentrated disproportionately in London during
this period, continuing the trend of the immediate
past. Over a 10 year period the difference
envisaged under the base scenario is a 20%
growth in office-based sectors in Inner London
versus 15% in the rest of the UK. The downside
scenario exacerbates this difference (17.5%
versus 12%). The downside scenario impacts
Inner London with a sharp fall in employment
growth in 2015-17, but a stronger recovery and
a compensatory upswing afterwards, although
employment growth is weaker over the period.
Over a 10 year period the upside and base
scenario have similar outcomes, as capacity
constraints mean that higher growth early in the
period will be matched by lower output later on.
The downside scenario does have an impact on
employment, but it is not very large.
These scenarios have different impacts in terms of
the amount of floor space which will be needed to
meet demand depending on the efficiency of floor
space utilisation, which we explore below.
Trends in density
The expectation that workspace density will
increase will, in turn, reduce the amount of space
needed to satisfy a growing workforce. Reducing
the amount of space occupied can be achieved
by movement in two dimensions of work, Firstly,
simply increasing the efficiency of occupation,
and secondly, through flexible work styles, which
refers to the manner in which employees occupy
their workspace. These are founded on the degree
to which mobile technologies allow employees to
reduce their dependence on a fixed workspace.
Regarding the first dimension, a member of the
Ramidus Consultancy, which produced the Taking
Stock report, Rob Harris, has observed:
More dynamic use of space,
aka desk sharing, allows a
building to support more people
in the same amount of space:
space-less growth. The impact
can be dramatic, often reducing
an organisation’s appetite for
space by around 20%-30%.
(Reflections on a modern office, Ramidus
Consulting, 2012)
Alongside this increasing density, there has been
a change to a variety of layouts. The move from
cellular offices to open plan, largely now achieved
in modern offices, increased efficiency. In a
similar manner standard grid pattern workstation
arrangements are beginning to give way to ‘more
dynamic environments in which team work,
collaboration and meeting space occupy far
greater proportions of space’, but which can also
be used far more intensively.
This has had a measurable impact on
occupational density over the last decade,
as studies have identified a rising density of
workspaces. Starting with studies from the late
1990s through to the most recent BCO reports of
2009 and 2013, the average has come down from
14sq m per workspace (approximately 150 sq ft)
to 10.9 sq m (130 sq ft).
This last figure comes from the BCO’s 2013
survey utilising a large IPD database of office
characteristics. It is biased toward larger more
modern buildings by virtue of the institutional
ownership which comprises the IPD sample.
All of which makes it very relevant to the City of
London given the predominately ‘institutional’
nature of its office stock. The results vary between
geographies and occupier sector. For the City the
relevant sectors are Financial and Insurance (9.7
sq m), TMT (10.5 sq m) and Professional Services
(12.3 sq m), while in London a whole the average
was 11.3m sq m, slightly higher than nationally.
The report concludes:
What this highlights is the
diversity of the demand market,
and the fact that the occupancy
styles of large sections of that
market make very different
demands on buildings to those
in the financial and professional
services sectors.
(Occupier density study 2013, British Council
for offices)
This is important for the City, in the context of a
reduction in activity from the financial sector and
rise in activity by other sectors, particularly TMT.
However, on balance we consider the London
average (i.e. 11.3m per workspace, or 122 sq ft
per person) an appropriate benchmark to adopt.
Adjustment to the expected growth by business
sector would make some upward difference in
density given the high concentration of financial
services, but we consider that using the
London average provides an allowance for
unoccupied space.
Calculating the required
increase in stock for the
City and Inner London
Applying the forecast increment to employment
produces a total for necessary addition to stock
for the City of between 5.1m sq ft (base and
upside scenarios) and 4.3m sq ft (downside
scenario) over the next decade. Of course, any
movement into higher densities will not just be
for the additional staff employed, but will be more
generally related to the amount of movement
of firms in the market, through take-up. The
movement to new premises is, after all, the ideal
opportunity for established firms to increase the
density of workspaces. As such, the estimate
could be viewed as at the upper end
of requirements based on the forecast
employment growth.
City Offices
Getting the
Balance Right
33
Table 3: Implications of forecast employment growth for required office stock
Forecast office employment
growth 2013-23
Required increase in stock
(at 1 worker per 11.3 sq m)
City of London
42,000 staff
5.1 million sq ft
Inner London
313,000 staff
38 million sq ft
While these calculations for the City project a
relatively modest uplift in stock, the same metric
for Inner London yields a much larger required
increase of 38 million square feet, based on
forecast office employment growth of
313,000 staff.
This presents an opportunity for the City to
capture a much larger share of this growth
going forward, and so it may be the case that in
attracting occupiers from other Central London
locations, the City needs a much larger increase
in stock.
The increment to stock produced by development
in the last decade in the City proper was 6m sq
ft on a development total of 22.6m sq ft. The
measures we have derived from prospective
development over the next five years indicate
an adequate potential addition to stock over
the medium term. In addition, a similar amount
(5.4m sq ft) could potentially be added if all extant
planning permissions were implemented. As such,
we consider that there exists sufficient potential
development to meet expected demand in the
City, but capturing a greater share of the projected
growth for Inner London would require a much
larger level of development activity.
City Offices
Getting the
Balance Right
34
What are
occupiers
looking for?
Occupier preferences are
changing, with a focus on locations
that enable them to boost
productivity and attract and retain
talent. Corporate productivity will
be the strategic objective driving
property demand over the next
decade, now that cost reduction
as an opportunity has largely been
explored. Across all sectors the
priority is an environment which
can accommodate a range of
work styles, one which facilitates
communication and collaboration.
What are
occupiers
looking for?
Alongside this, occupiers are
facing a ‘war for talent’, with
employee well-being becoming
central to recruitment and
retention. This will need to
be reflected in workspace
and workplace. Occupiers
will be looking for locations
which provide an attractive
environment for staff to work,
socialise and in many cases,
live. This will entail extensive
transport linkages, an attractive
retail offer and close proximity
to residential. This has clear
implications for the City and its
‘sense of place’.
Productivity agenda key for
corporates
Corporate productivity will be the strategic driver
of property demand over the next decade, now
that cost reduction as an opportunity has largely
been explored and developed. The Leesman
review6 finds that almost half of office based
workers felt that their current workplace did not
enable them to work effectively. Landlords and
developers will increasingly need to communicate
productivity measures to tenants and potential
occupiers, using metrics including worker
satisfaction and absenteeism.
JLL’s global real estate survey found that 75%
of real estate professionals were seeking to
reduce direct property costs, and we have seen
evidence of this in the rise of consolidation activity
as a driver of office take-up. However, there is a
tension here in that 68% also reported that they
were tasked with enhancing the productivity of the
existing workplace.
Leesman index,
leesmanindex.com
6
City Offices
Getting the
Balance Right
37
So it is not just cost. There is a huge movement
to drive productivity of staff by creating an
environment that is attractive and exciting for
the best talent, and creating a working
environment that promotes ‘well-being’ is
increasingly important.
Of course, occupiers are also motivated by the
desire to locate in clusters with their clients and
competitors to benefit from agglomeration. The
City provides unrivalled benefits in this regard
as a well-established cluster for businesses
across several key sectors. However, it will
also be important to recognise these broader
occupier trends and their influence on locational
choice. The City needs to facilitate the provision
of productive office workspace that nurtures
creativity and collaboration. If it does this in an
environment full of amenity then all the ingredients
will be in place to attract occupiers.
The war for talent
The strengthening economic recovery and high
demand for specialised skill-sets has reignited a
war for talent. A third of UK CEOs see filling talent
gaps as a top 3 investment priority over the next
12 months, and they are attempting this at a time
when 60% of organisations note difficulties in filling
vacancies over the past year. The war is raging,
and property and location are increasingly being
used as part of the armoury in this war.
Employee well-being is becoming central to
talent retention and will need to be reflected in
workspace and workplace. The war for talented
people is not just about attracting skills but also
about retaining them. Once again this strengthens
the strategic role of property and location. A trend
set to grow over the next decade is a stronger
focus on creating healthy workplaces that really
place a premium on employee well-being. 74% of
respondents to the CBI Healthy Returns Survey
see employee well-being as a top or important
priority in talent retention. Combating high levels of
worker stress prevalent in the workplace and truly
enabling a strong balance between work, life and
health will be a further consideration in the location
and property decision making process.
People are the largest operating cost and
highest source of competitive advantage for
office occupiers. The competitiveness of the high
skilled labour market has made the quality of the
working environment/ business premises and their
surroundings an important factor in attracting and
retaining talent.
City Offices
Getting the
Balance Right
38
By 2025 Generation Y employees, currently in
their 20’s will represent significant proportion
of the workforce. This demographic places a
greater emphasis on work-life balance. There
is also a growing trend towards working across
multiple locations, as technology allows this and
organisations are increasingly accommodating of
this trend.
Importance of place making
The places we build around
us affect everyone, every hour
of every day. They are the
‘backdrops’ to our lives and
shape the way we think,
move and feel.
(CABE)
People increasingly want more from their office
space; they want something beyond the traditional
desk and meeting room offering. The modern
occupier wants a mix of environments to facilitate
collaboration and creativity. They want to work
fluidly between desk, breakout, terrace, café.
They need the technology to make this possible
and they also want the amenity, both internally
and externally, to make it a desirable place to
work. The war for talent is on and destination
workplaces are the most likely victors in
attracting the best people, and therefore, the
best companies.
In identifying this, major corporates are having
to change their strategy for attracting and
retaining the best talent. One of these is locating
their offices in the best environment. These
environments are a combination of the best
external and internal places, where talent wants
to work, collaborate, socialise and in many
cases, live.
The design of the public spaces and the quantum
of retail and amenity space within the City needs
to be seen in this context. It needs to position
itself to keep pace with this change and ensure
it remains the premier destination for modern
businesses. This positioning must recognise the
focus on people, place and productivity mirroring
the key elements occupiers are focussing on to
improve their competitiveness and profitability.
Emerging sub-markets such as King’s Cross
have been designed to create a destination rather
than just self-contained office locations. As well
as a mix of uses, including residential, retail and
leisure, there are also community amenities and
accessible public space. These districts place a
greater emphasis on ‘place making’, optimising
the mix of uses to ensure that the area remains
vibrant throughout the day and week, creating
attractive places to work. The City’s historic
restriction of non-office uses means that it faces
a greater challenge creating a more diverse
environment.
In subsequent sections, we explore the issue of
the use of space, and the challenge to ensure the
right balance between preserving the City as a
leading global employment hub, while creating the
right environment to ensure occupiers continue
to be attracted to the area. We discuss the
issues surrounding the provision of an attractive
and vibrant retail offering, and also the broader
importance of place-making to ensure the City
remains an attractive destination for the occupiers
of today and into the future.
However, place-making goes beyond the provision
of a mix of uses. Careful consideration must be
given to the constituent parts that create the
place, including public spaces, permeability,
amenity and culture. The most successful places
are those that engage and embrace their wider
area and encourage flows of a much wider
audience through them.
A place is somewhere people meet and
congregate, socialise and increasingly collaborate.
It must offer the environment that people want
to utilise for those purposes. The creation of
‘fortress’ locations does not reflect the values of
the modern day occupiers; engagement with the
wider community does.
Community is at the core of most occupiers’
corporate social responsibility policies as well
as many employees’ priorities. The City can tap
into this demand through the provision of events
spaces for public exhibitions and cultural events
and the creation of a dedicated programme of
events to enhance the place.
A vibrant retail offering
The City has a very strong retail
offer, with only Westminster
achieving a higher Retail Variety
Index score.
(The Effect of Firm Migration 2013).
As a predominantly office-based environment,
the City has always been a popular location for
convenience goods retailers. Comparison goods
retailers on the other hand have not historically
built up a significant presence and as a result the
City lacks the scale and diversity of retail offer that
would enable it to become a popular shopping
destination in the weekend. This is mainly driven
by the lack of local residents and limited flows
of tourists, who remain concentrated around St.
Paul’s Cathedral and the Tower of London. In
addition, the retail offer in the City is spread across
various locations, each appealing to different
shoppers but limiting the creation of a critical
mass of popular brands and individual retailers.
The City faces strong competition from the West
End, with its well established retail, leisure and
amenity, as well as new developments like King’s
Cross which are ‘place making’ from the outset.
Canary Wharf has also improved its retail and
amenity offer.
However, the City is already adapting and
improving its retail offer and recent years have
seen rising numbers of comparison goods retailers
in the city. A key driver for change has been the
opening of One New Change, with 220,000 sq
feet of retail space, and the completion of retail
units below newly developed office space on
Cheapside. Cheapside has always been the City
of London’s main shopping street. Zone A rents
have improved significantly since the rejuvenation
of the area and most retail units have been re-let.
One New Change opened in October 2010 and
is located at the St Pauls end of Cheapside. The
larger retail units have successfully attracted
popular retail brands, such as Superdry, Topshop,
GUESS and Karen Millen, significantly improving
the local fashion offer.
The City offers various additional unique shopping
locations. The Royal Exchange is a luxury retail
destination, located east of Cheapside/Poultry
at Bank underground station. The increased
popularity of Shoreditch and Hackney among
London’s young professionals as a living
destination has helped to drive sales at Spitalfields
City Offices
Getting the
Balance Right
39
Market and BOXPARK. BOXPARK is a pop-up
mall in Shoreditch, offering a mix of trendy fashion
and lifestyle brands, while Spitalfields Market is
focussed on cutting-edge fashion and vintage art.
Other key retail locations within the City include
Moorgate, and the areas in and around the
major trains stations, such as Liverpool Street
and Farringdon.
Vacancy within the City of London area is low,
but is higher towards the fringe areas, particularly
around Bethnal Green Road, Brick Lane, Old
Street and Commercial Road. However, vacancy
in the wider City area has fallen over the past two
years from 22% to 16% and is likely to continue
falling as the economy recovers. In addition, Tech
City in East London is attracting new small, fastgrowing digital technology companies and
young professionals.
Rental levels are expected to rise in most of
the City and fringe areas as the supply of good
quality space is limited. The success of One New
Change, particularly from retailers located on
Cheapside, has attracted the attention of various
young fashion brands who are trying to secure
space in the area. Demand from convenience
retailers, restaurants and coffee stores operators
across the wider City of London also remains
healthy, but securing new suitable space to trade
in requires creativity, due to the limited supply and
development of new space.
Long-term developments also attracts interest
from investors and developers. The anticipated
opening of Crossrail by late 2018 will increase
passenger flows around Farringdon, Liverpool
Street and Whitechapel, making these locations
more attractive for both retailers and leisure
operators. The planned development of luxury
apartments targeted at wealthy foreigners along
the south bank of the River Thames between
Big Ben and St. Paul’s Cathedral will also likely
drive demand from luxury retailers and high-end
restaurants for space in the City of London.
Residential proximity
It is widely recognised that the supply of housing
is a key issue for London, with values rising and
making the conversion of offices to residential
use an attractive proposition for developers. In
this context the City faces the same pressures as
elsewhere in London, in terms of the challenge to
provide adequate housing in close proximity to the
office stock in order to accommodate staff and
thereby attract occupiers.
Residential development in the Square Mile has
always been constrained, reflecting the need to
preserve the City’s role as a pre-eminent global
business hub. The City is, however, centrally
located and well-connected to other parts of
Figure 21: Key retail areas in and around the City of London
City Offices
Getting the
Balance Right
40
Source: JLL
Figure 22: Map of residential development in and around the City of London (covering EC1-4)
London, and as such it has not been necessary to
offer a significant quantity of residential within the
City itself to preserve attractiveness as an office
location. That said, as competition for occupiers
from other London sub-markets increases, it
would be desirable for the City to enhance the
residential offering to bolster its attractiveness.
Of course, this always needs to be done without
compromising the ability to provide adequate
office stock and cater to rising demand in the
future. One way this could be achieved is through
ensuring such units are privately rented, rather
than sold on a freehold basis, which would also
help to maximise vibrancy and effective density.
In this light, it is encouraging that recently there
has been a strong uptick in the level of residential
development completions in the City Fringes,
and it is likely that the residential offering in close
proximity to the City will continue to expand.
urban-living. Projects such as The Heron, together
with a healthy pipeline of new developments,
mean that the City residential market is expanding.
The quantum of schemes currently underway or in
the pipeline will potentially bring greater vibrancy,
an urban-living feel and enhanced retail and
leisure services.
Pressure for office to residential conversion
Office markets in Central London are cyclical, both
in terms of rental value and yield. Long-term rental
values have tended to grow only slowly (as in the
West End) or not at all (as in the City). However,
this cyclicality of office rental value has not been
mirrored in the change in residential values, which
have risen considerably in nominal and real terms
over the last 20 years. In the City, residential prices
have grown by 175% since 1995, compared to
the current cyclical position for City capital values
at 53% over the 1995 position.
Compared to other London areas, the City
residential market is relatively immature. There
have been a number of residential schemes
developed over the past 10 years but it is only
recently that the market has begun to gain traction
and critical mass.
Heightened development activity is now energising
the City and its immediate surrounds and the
City is becoming a vibrant location for mixed use
City Offices
Getting the
Balance Right
41
The chart below shows the capital value growth
index for residential property in Tower Hamlets
compared to capital value growth in the E1 sub
market and the City (there is insufficient data to
allow a similar residential price series for the latter).
This shows clearly the divergence, established
before the index’s starting point in 1993.
Figure 23: Office and residential capital value
index
Forecast
220
200
2001=100
180
160
140
120
100
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
60
2001
80
Tower Hamlets residential capital values
City prime offices capital value
E1 prime office capital value
Source: DTZ
Strong growth in Central London residential
values is making the conversion of office sites
to residential use attractive to developers and
landlords. In a property market with no barriers to
change of use the contrast between commercial
and residential values could be expected to
motivate landlords and developers to move from
offices to residential use. However, for most
local authorities there is a presumption in favour
of retention of office stock, in order to support
employment capacity.
At the same time, the widely practiced process
of treating applications for permission ‘on their
merits’ injects a significant degree of uncertainty
into the determination of an office to residential
scheme’s progress. In practice, most Central
London local authorities have sought to establish
that the removal of office capacity will not
adversely impact employment. This can be
demonstrated through obsolescence or lack of
viability for commercial development.
Most Central London boroughs have had a policy
of safeguarding existing employment use, but
have allowed a change to residential or mixed
use if a case can be made that the building
is not needed for employment use or can be
redeveloped to provide replacement space as well
as other uses.
City Offices
Getting the
Balance Right
42
The City Corporation, despite the lack of a formal
policy controlling conversion to non-office uses,
has always been concerned about the spread
of non-office use into inappropriate areas. While
it has sought to protect non-office use in some
instances, it has recently introduced policies in the
Local Plan to resist loss of office use. Its central
priority has been to ensure the scope for provision
of additional office development to meet demand
from long term employment growth, supporting
the City’s role as a leading international financial
centre. This has made change of use away from
offices more difficult to achieve.
There have also been other considerations in
permitting new residential buildings in office
areas. Amenity issues for residential properties,
especially right to light, make office development
on adjoining sites more difficult. As a result, the
City has been reluctant to give permission for
redevelopment of office sites, and this is
reflected in the paucity of such developments
in recent years.
A change in government policy has changed
this balance somewhat recently. It now allows
conditional permitted development rights for
the conversion of existing office buildings into
residential use. Quantity Surveyors’ EC Harris’s
conclusions on the viability of pursuing this
option makes it clear that “the proposed planning
changes, although suggesting a presumption
towards granting B1 to C3 change of use, will not
apply if there are any material amendments to the
exterior appearance of a building either by facade
changes or external extensions.” In other words,
if anything else than internal conversion
is required then planning consent will still
be required.
This quicker and lower cost option of conversion
rather than comprehensive redevelopment or
new build may be attractive in non-prime locations
serving a working resident or buy to let audience,
but will probably not suit higher value markets
where design and amenity issues are
more prominent.
In any case, the City Corporation, along with its
adjacent boroughs in Central London sought and
secured exemption from this ordinance for areas
mostly, but not entirely, within the existing Central
Activities Zone of Central London. Thus residential
development policy will be unchanged in the
City. Nevertheless, its implementation will add to
the pressure on non-residential property outside
the central area. Conversion will be facilitated,
especially amongst smaller, older units which
have fewer of the structural drawbacks, and
office capacity outside the centre will diminish
even further.
Contacts
JLL
DTZ
Jon Neale
Head of UK Research
22 Hanover Square
London W1S 1JA
+44 (0)207 087 5508
[email protected]
Richard Yorke
Head of UK Research
125 Old Broad St
London EC2N 1AR
+44 (0)20 3296 2319
[email protected]
Karen Williamson
Associate Director
UK Office Research
22 Hanover Square
London W1S 1JA
+44 (0) 203 147 1197
[email protected]
Martin Davis
Central London Research
125 Old Broad St
London EC2N 1AR
+44 (0)203 296 2304
[email protected]
Ben Burston
Head of UK Office Research
22 Hanover Square
London W1S 1JA
+44 (0)207 399 5289
[email protected]
James Norton
Associate Director
UK Office Research
The Walbrook Building
London EC4N 8AF
+44 (0)207 087 5033
[email protected]
City Property Association
Jace Tyrrell
City Property Association
St Albans House
57-59 Haymarket
London SW1Y 4QX
+44 (0)207 630 1782
[email protected]
City of London
Simon McGinn
City Property Advisory Team
City of London
Guildhall, PO Box 270
London EC2P 2EJ
+44 (0)207 332 1226
[email protected]
City Offices
Getting
the Balance
Right
March 2014