Occupiers remain cautious, but prime offices are in short supply – Jones Lang LaSalle
Despite a recent improvement in corporate sentiment, according to European Commission data, corporate occupiers of office space in the UK remain cautious and activity levels are still subdued, says Jones Lang LaSalle. But occupiers should be ready to act, the firm says, because market conditions could turn against occupiers very quickly, given the shortage of Grade A space, “if there is even a minor increase in demand”.
Already, the scarcity of prime offices has led some landlords to hold rents firm for the best space and to start to reduce tenant incentives. Structural lease events and a number of active requirements will generate a modest level of activity in the year ahead, the firm says, and it believes that this will be enough to put more pressure on the already limited stock of Grade A office space.
Choice in the Central London offices market has decreased overall, with vacancy rates falling to 5.8% in Q4 2011 from 6.3% the previous quarter and Grade A rates remaining at 3.7%. Choice also decreased in several regional markets during the final quarter of last year, including the markets for offices in Bristol and office space in Birmingham. In some other areas, overall supply increased as more secondhand space was released onto the market. “Choice of Grade A office space continued to fall in a number of locations and is particularly constrained in West London and Manchester with vacancy rates of 2.7% and 2.8% respectively,” JLL notes.
JLL says that many companies that have previously considered consolidation are now carrying out this activity, to drive business synergies and reduce occupational costs. Some companies are taking this opportunity to “right-size” their businesses – but those seeking new, more efficient office space to buy or to let need to allow longer lead times when making their selections, as Grade A offices are in short supply.
Many companies are re-gearing their lease terms in markets where supply and rents remain suppressed, the firm notes, and this remains a “major opportunity” for occupiers in 2012, JLL adds. “Upside benefits include but are not limited to: negotiating break clauses / extending lease terms to gain rental holidays or capital payments, altering lease language to build in flexibility to sub-let / assign, contributions towards refurbishment works, cap on service charge, and removal / reinstatement of dilapidations liabilities,” the firm notes.
“Subject to further economic events, we anticipate confidence will improve in the second half of the year as more positive hiring expectations should filter through to sentiment and then leasing volumes,” JLL predicts.
