Earlier in the year we released the third report in our London Business Footprint series in which we looked at the growth of the serviced office sector within London. Since then it feels like we are seeing weekly announcements of serviced office operators and co-working space specialists taking more office space, and not just in second-hand buildings. This is an occupier type that is now targeting new developments.
In 2015 to date there has already been almost 400,000 sq ft of space leased to serviced office operators in central London. This is almost double the level recorded in the first six months of 2014 (see chart below), reflecting the growing demand from this type of tenant, with half of the space taken so far this year being Grade A. As we suggested in our serviced office report, the demand for good quality space from this type of occupier is expected to increase over the next few years. While the latest London Office Crane Survey research did not record any leasing activity on development schemes by serviced office operators, following its publication we have since noted two significant deals on new schemes. With the research for the next Crane Survey starting imminently, are the current market dynamics facilitating or hindering a drive towards new space for this sector?
Source: Deloitte UK
Firstly, availability of office space across central London is at a 15-year low. While the low level supply of Grade A space could be forcing operators to seek out Grade B offices, this grade of space has also seen a sharp decline since its recent peak in 2009 (-55%). Conversely this could force some to only look at new schemes, and for developers, serviced office operators certainly add an interesting dynamic to the tenant mix in new schemes. Secondly, for some serviced office operators, location is key and therefore choice of space is reduced further. One thing for certain is that serviced office operators and co-working providers are set on a course of expansion and new developments may well be their main choice as supply continues to be eroded.