Serviced office operators impacting on demand in both a positive and negative way

Supply and demand snapshot

■ November 2017 was a relatively quiet month in terms of take-up, with 226,001 sq ft leased. However, the total for the first 11 months of the year is 16% above the same period last year at 4.26m sq ft.

■ This means that the full year total of leasing activity in 2017 will comfortably exceed both last year and the ten year average. Indeed, we expect that this year will be the second best year on record for West End take-up.

TABLE 1Key November stats

^{Source: Savills Research}

■ As Graph 1 shows, a significant contributor to this total has been the serviced office sector, which has accounted for 18% of the space leased in the West End this year (809,664 sq ft). However, the TMT sector remains the most dominant in the West End, acquiring 1.26m sq ft of office space over the first 11 months of 2017.

■ One area where the serviced office sector has had a notable negative impact on take-up has been on smaller lettings. We estimate that the number of lettings of less than 5,000 sq ft has fallen by 4.8% compared to 2016, and 5.6% on 2015.

■ Going forward this is likely to impact some West End submarkets more than others, with the average size of letting over the last five years in Mayfair and St James's for example being 6,291 sq ft and 5,528 sq ft respectively.

GRAPH 1West End take-up in 2017

^{Source: Savills Research}

■ The supply-side of the equation continues to swing further towards a landlord-biased market, with the overall West End vacancy rate falling from 3.8% to 3.7% this month. This means that there is now less than one year's supply of available office space in the West End (based on a 12 month rolling average take-up level).

■ The total level of availability in the West End has now fallen for five consecutive months. More importantly for rental trends the proportion of that supply that is tenant-controlled has fallen from 37% to 32% this month.

GRAPH 2West End supply & trend

^{Source: Savills Research}

■ The overall trend in availability is unlikely to change significantly in 2018, as half of the developments and refurbishments that are due to complete in 2018 are already pre-let.

■ The tight supply should support rental levels going forward, and while the average rent achieved on Grade A space in November fell by 6% month-on- month to £78.18/sq ft, it was 5.4% up on the same month in 2016.