Is the London office space market turning?

Over the last few weeks, there have been discussions that the central London office space market could be teetering at the top, about to turn.

Eugene O’Sullivan, Managing Director at Morgan Pryce, said: “From Morgan Pryce’s perspective, this is mostly hot air. Even though it would certainly be a welcome Christmas gift for acquisition agents such as ourselves, many are getting over-excited at the first sight of a reverse premium. Still, there are no substantial grounds for believing this.”

If the London office market was experiencing an increase in reverse premiums it would signal that the market was turning, similarly to what happened during UK’s financial crash, when companies could no longer afford their rent and were desperately trying to assign their leases.

However, some foreign economies such as Turkey, Greece and China have recently experienced monetary challenges, resulting in businesses struggling to keep their premises. In addition, as oil and gold prices have fallen, certain business sectors in the UK have also faced challenges covering their costs. These are the companies who may not be able to afford their rent, and consequently causing acquisition agents to anticipate the turn in the office space market.

Figures also show that landlords are reducing rental levels, and this arguably has resulted in a more relaxed market in comparison to six months ago; office space is staying on the market for longer, there is more space available and the acquiring parties are not as eager to committing to high rents in less prominent areas.

Eugene commented: “The market will remain strong well into 2016 as the high levels of demand still outweigh supply. We are looking forward to seeing the new spaces come into play towards the end of 2016, but even then it seems unlikely rental growth will become negative. The main reason we have found as to why some rents are dropping is that landlords and their agents, who have a monopoly on a submarket, have been artificially hiking the market level. As this is not sustainable, the landlords are now forced to lower the rents.”

Is the London Office Market Turning? Most likely not – it will plateau and find a balance with unsustainable top rents dropping off. Demand remains high and supply of stock low and this will be the case for most of 2016. 

This news was brought to you by Morgan Pryce, a specialist tenant acquisition agent with offices in Oxford Circus and the City. Morgan Pryce specialises in search, negotiation and project management and works exclusively for tenants.