Supply squeeze begins to frustrate Take-up in Midtown. Investment turnover down.

Supply squeeze begins to frustrate Take-up in Midtown. Investment turnover down.

13 January 2016

The tight supply in Midtown is severely affecting Take-up, with leasing activity in the 4th Quarter 2015 falling below the 10 year quarterly average.

Availability in Midtown remains at a historic low 2.9% and after a robust first three quarters in 2015, Take-up for the period September - December fell to 464,000 sq ft, 34% below the long-term quarterly average.

However, the supply-demand dynamics continue to apply upward pressure to rents, with Wadhani’s acquisition at WELPUT’s Orion House, WC2, at £90 per sq ft, setting a new benchmark for the market.

Whilst the majority of space available in the 4th Quarter was still Secondhand, New & Refurbished supply now accounts for 40% of total Availability. “Normally”, this quality of accommodation is no more than 15-20% of total Supply; this illustrates the continued level of Take-up in Secondhand and lack of New/Refurbished completions, not a drop off in demand for higher quality space.

The Midtown future pipeline had a significant boost in the 4th Quarter with six new starts that will eventually contribute 499,000 sq ft of new and refurbished stock, the largest total of starts since the 3rd Quarter 2007, although in the short term, new supply remains tight. Only 18,000 sq ft is due to be completed in the 1st Quarter of 2016 and so we fully anticipate discussions taking place with tenants keen to commit early on some of the new stock being refurbished.

Investment Turnover for the 4th Quarter was £567m in just ten transactions, a 45% decrease on the previous quarter, the corresponding last three months for 2014 produced £1.33bn. This quieter end to 2015 was a key reason why turnover for the whole of 2015, at £2.6bn, was considerably down on the total for 2014 which delivered £3.84bn.

Notable transactions for the 4th Quarter include 90 Fetter Lane, EC4 (£45m), 100 New Bridge Street, EC4 (£146.5m), 12-14 New Fetter Lane, EC4 (£148m) and The Davidson Building, 5 Southampton Street, WC2 (£66.2m).

Jules Hind, Leasing & Development Partner:

“We have been predicting that the lack of supply in Midtown would begin to frustrate Take-up and this is now bearing out."

“Midtown has become a two-tier market: with a currently small number of large, big ticket deals on New stock or Refurbishments, supplemented by a high volume of churn at the lower level.”

“We are currently lacking office buildings of scale, but this should be readdressed in 2016, and Take-up levels should recover. Whilst more supply is undoubtedly good for the market the supply pipeline is still relatively limited and the developers who are starting schemes now will still find a landlord friendly market when their schemes reach completion.”

Alastair Hilton, Investment Partner:

"General consensus is that Central London Investment turnover figures for 2015 will be at approximately £20bn as previous years and so the prognosis for Central London still remains good.”

“Midtown’s figures are a reflection of the limited opportunities presented through the year, as appetite remains. However, we have had some market withdrawals which reflect market sensitivity to pricing. This is as expected as we have a pricing regime where yields are at historic lows and capital values at historic highs.”

“Performance will therefore, in the main, hinge on rental growth and as Investors seek performance, entry prices could be compromised.”