_Central London Offices: One year on from the UK referendum

One year later, the market has surprised us. Demand is unexceptional but critically it has not tanked. 

Take-up in Q2 was 3.2 m sq ft, just above the long-term average of 3.1 m sq ft. This follows a Q1 figure that was spot on the long-term average. This is hardly a spectacular performance, but it is far better than one would have imagined a year ago.

The tech firms and flexible office operators appear to have shrugged off Brexit, and show no signs of losing momentum. Yet, look at supply and the picture darkens slightly.

Availability stands at 16.2 m sq ft, up 19% on a year ago; although that is not alarming compared to a long term average of 16.3 m sq ft. However, note that the rate of increase is decelerating (see graph).

So an average level of demand is preventing supply from surging as it did in 2007-2009; and to this backdrop occupiers are finding it easier to win more incentives than chip the rent.

Consequently, much depends on whether demand can continue at a pace that keeps the market liquid. On maintaining demand levels, there are obvious concerns. Brexit remains a wet blanket on the financial sector, for instance. However, I see three emerging new sources of demand that should exercise their influence on the market in the next two to three years.

First, London is a Global City, and the pulse of the world’s economy is starting to quicken. Growth in China is picking up, and the US and Canada are raising interest rates because their economies no longer need exceptional support.

In the Eurozone unemployment is falling. As the global economy gains momentum London will benefit from the rising tide, probably just not as much as it would under normal circumstances.

Foreign banks are unlikely to expand here until we see the Brexit deal, but for tech firms the attraction of London is its talent, as an algorithm written in London can be used in software all over the globe.

The cheap pound increases the logic for a foreign firm in making a long-term investment in London today; as shown by the arrival of SnapChat, who acquired their first London office in April.

Secondly, cyber security is hurtling up the corporate agenda, and this will create more employment in London and ultimately increase demand for office space.

The recent Wannacry virus and the hacking of Parliament’s email server are among a blizzard of high profile hack attacks we have seen lately. The effects of cyber attacks appear to be spreading wider, with not just politicians being targeted, but corporations and even hospitals in the firing line. Cyber security is now a hot topic and organisations are strengthening their defences, either in-house or via outsourcing to external specialists. This should generate new office demand.

Thirdly, firms are preparing for a world where robotics and artificial intelligence play an ever greater role in our lives, and consequently the value of data is surging. Companies ranging from banks to supermarkets to telephone companies hold huge quantities of data on people that can provide invaluable insights into human behaviour, which in turn will allow these actions to be automated. This is ‘big data’.

For a future world where your fridge handles your grocery shop, digital assistants manage personal finances, and cars drive themselves, this data needs to be mined and analysed; but at present it is largely untapped in server computers.

In the coming years I see more firms looking to unpack and examine the vast amounts of data they hold, and this will involve software and people. Some firms will develop new in-house departments to do this, others will turn to specialist providers. Either way, more people will be employed, and offices acquired to house them.

What is particularly interesting from the perspective of the London economy is that all of these trends will continue over the next two years irrespective of the outcome of the Brexit negotiations.

Read more in the latest Knight Frank Central London Quarterly Q2 2017