A recession is coming, we know this much is true. And with recessions, within the commercial property sector, history shows us this means the return of office space to the market as some businesses rationalise their property footprint where possible against heightened economic pressures.
Referring to the chart below you can see this was the case in London following the 2001-02 stock market crash when tenant supply– also known as grey space – rose to 10.7 million sq ft, and again during the 2008 Financial Crisis when tenant supply rose to 5.3 million sq ft. Therefore it will come as no surprise that the volume of tenant-controlled space being returned to the market in London has begun to increase, albeit gradually.
There is certainly no evidence to date of a flood of space onto the market. Our figures show that, since lockdown began on 23 March 2020, 806,000 sq ft of tenant supplied space has been returned. This takes total tenant supply in Central London to 3.8 million sq ft, notably still below the long-term average (3.9 million sq ft) and comfortably below peak tenant supply in previous dips.
To put this into context, tenant supply now accounts for 31 per cent of total availability in Central London which, in itself, remains constricted at 12.3 million sq ft (4.9 per cent vacancy rate), 10 per cent below the long-term average for total supply.
Of the tenant space released since the beginning of lockdown, Savills data shows 72 per cent of the number of units is accounted for in units under 10,000 sq ft with only four larger units over 25,000 sq ft. Furthermore, our analysis shows that only 36 per cent of these sublets were triggered post-lockdown.
There are other factors at play. The level of Government support clearly acts as a cushion and we won’t see some businesses make decisions regarding their property until the furlough scheme ends. However, even if the workforce declines, businesses may choose to hold onto all of their existing space to cater for social distancing. For now, the focus appears to be on enabling the workforce to return to work safely.
Rather than focusing on the rise of tenant space and questioning why such a rise is happening – to suggest it’s because ‘the office is dead‘ is to wrongly over-simplify market fundamentals that have existed for years – we should be looking back to see how quickly the cycle lasted before tenant supply dipped again.
In both downturns previously cited, tenant supply appears to rise for three years before sharply falling. It’s worth reminding ourselves here that we’re entering this recession having seen significantly less speculative development than previously. With one of the most restricted office markets in the world, London is in a strong position to absorb further increases and ride this out.
And a rise in tenant supply can bring new opportunities, creating availability in areas where there previously were none. It can also offer tenants looking to move short-term lets at a time when there is demand for ever more flexibility. Serviced offices can provide flexibility but not your own front door which remains important to many occupiers.
A sub-leasing market is nothing new, we’ve been here before and we will no doubt be here again. In the short-term, we expect occupiers to be particularly cautious but in the medium term, as we adjust to some sort of new normal, the market will rectify itself.
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