28th April 2021
Quarterly research released
South Bank Market Overview – 2021 Q1
Take-up levels for Quarter 1 were very subdued with just 36,209 sq ft transacting across 9 deals, down 54% quarter on quarter and nearly 4 times lower than Q1 2020. The South Bank market has been very quiet whilst the country remained in lockdown which is evident with the lowest quarterly Take-up volume that we have ever recorded.
The largest deal of the quarter and accounting for nearly half of the volume transacted was at The Grain House, 46 Loman Street, SE1. Guy’s & St Thomas’ Charity agreed a lease of 17,000 sq ft on a ten-year term over the 2nd to 5th floors. The Grain House is currently undergoing a refurbishment which completes in Q2 this year. The remaining deals of the quarter were all on floor plates sub 5,000 sq ft from a mix of occupiers including Charity based and Professional.
With such limited transactions to analyse it is difficult to pull out any specific trends. What we do know is that occupiers are looking for high quality space offering wellness credentials, excellent amenities, and outdoor space and the South Bank has a dearth of Availability that meets these demands.
Our internal viewing numbers do however paint an improving picture of activity and we are witnessing an increase in negotiations across multiple size brackets. Despite a cautious start viewing numbers are back to pre-pandemic levels and in March we recorded a record month of viewings, evidence that there is market activity of which we hope will translate into deals as the year progresses.
The pandemic has made companies re-think the way they live and work with agility being key for larger occupiers along with flexibility. The serviced office market has suffered a turbulent 12 months with the sector usually accounting for a quarter of office Take-up per year (five-year average). As occupiers continue to strategise there will be a need for short term flexible office space. However, IBM have just committed to 120,000 sq ft of serviced space at Southbank Place moving closer to Waterloo from their Head Quarter property on Upper Ground. This is a medium-term solution for them as they continue to decide their long-term office space future.
In addition, Synlab’s acquisition of Friars Bridge Court, completed just after the quarter finished and will therefore be included in quarter 2 figures. They signed on the 95,000 sq ft building on Blackfriars Road after WeWork surrendered the lease. This deal is the largest to transact in the South Bank since 2018 when WPP Group took 147,786 sq ft at 1 Southwark Bridge Road and is a sign of the diverse nature of occupiers in the South Bank market and gives confidence to developers that long term Head Quarter commitments are still taking place in the South Bank.
Available office accommodation in the South Bank stands at 1.2 million sq ft at the end of Q1. This is an 18% increase over the last three months, increasing Availability by 187,835 sq ft. Levels continue to be above the 10-year average (810,189 sq ft) and are the highest they have been for seven years. Availability levels have nearly doubled since the start of the global pandemic, however it’s important to dive into the numbers to understand the detail behind this rising levels.
The Availability rate is now 6.0%, up from 3.0% a year ago.
The increase in available space this quarter has been driven by the Second-hand Grade A market (up 28% quarter-on-quarter) with little additional refurbished space coming to the market and a reduction in Grade B space which is likely driven by landlords withdrawing poorer space with the aim of refurbishing it.
There remains no true brand-new space immediately available to occupy on the South Bank with no new buildings coming to the market since Q4 2019. This is set to change during the year with six buildings due to complete adding 396,391 sq ft of new or significantly refurbished available space to the market. Most of this space will complete in the next six months. Currently 79% of available stock on the market and immediately available is second-hand so the arrival of the newly refurbished office space will increase the choice of top-quality accommodation for occupiers.
We do however feel the traditional way of grading a building by quality gives a slightly distorted view of the space that is currently on the market. We have carried out an exercise whereby we have re-graded all the space on the market with a 5* rating (5 being the “best of the best” and 1 being the poorest). What this showed us is that buildings like the Shard and The Blue Fin are being classified as a second-hand Grade of space whereas the quality of the space continues to be high, therefore, we believe there is a larger quantum of quality space in the market than is being reported. Additionally, occupiers who are looking for the best space will also be considering buildings currently under construction which are due to complete within the next six months, further increasing choice. There will be a continued stretch in the divergence between the best refurbished space with the poorer second-hand quality stock which will all be competing to let against fitted CAT A+ space.
As expected, during 2020 the amount of tenant released space increased and we are now tracking 44% of the volume of available space as tenant released, totalling 530,815 ft, up from 36% at the end of Q4. The continued uncertainty of when the current market conditions will return to a level of normality will prolong the impact on the level of available space, and we expect Availability will increase further.
A quarter of the current Availability is on stock that can only offer a tenant a lease of three years or less. This further narrows the choice for an occupier looking for a traditionally longer lease or occupiers seeking tenant friendly lease events.
There are only 11 buildings that can offer a tenant a single floor plate of 10,000 sq ft or more in a building that is readily available now. Very limited choice - highlighting that despite the rising Availability levels there is not an oversupply of larger floor plates. In comparison a third of all buildings available are offering floor plates between 3-5,000 sq ft, a huge choice for occupiers. The majority of this is second-hand Grade A quality (67%).
The level of new construction in the South Bank remains subdued with no new recorded office starts or completions this quarter. There is currently 1.1m sq ft of space under construction /refurbishment of which 234,115 sq ft has been pre-let. All the space underway is scheduled for delivery over the next two years. The redevelopment of Hay’s Galleria (Hay’s Lane House, Goldings House, and the Tea Auction House) will be one of the first schemes to complete this year delivering 157,802 sq ft of refurbished space in the early part of Q2. It is believed that 28,000 sq ft of this space is under offer to an undisclosed occupier.
Over the next six months we expect 329,455 sq ft of space to complete which is currently available to let, this space will be actively competing with the readily available stock of good quality. Occupiers out looking for new accommodation are actively considering these schemes not yet completed. The Grain House, 46 Loman Street is a prime example of this having successfully pre-let 4 floors to Guys & St Thomas’s on a 10-year deal at the beginning of this year. The building is now nearly 70% let with construction due to complete in Q2 2021.
The two largest schemes due to complete in 2022 are “Arbor” formerly known as Bankside Yards (221,000 sq ft) and The Forge (139,000 sq ft). The level of space currently under construction remains historically low, we are however seeing developers begin to address this lack of new supply by gearing sites ready for a speculative start later this year. Fabrix Capital are a prime example of this with planning permission to redevelop the existing 1960’s building at 1-15 Pocock Street, to be known as Roots in the Sky. They aim is to create a 200,000 sq ft office building with not only a rooftop restaurant and swimming pool but also a 1.1-acre rooftop forest of over 100 established trees and 10,000 plants making it one of the largest urban roof gardens in Europe. Construction is due to start this year with a completion towards the end of 2024.
The level of activity in the Investment market has been extremely slow during the global pandemic. With just £61m transacting last year it was a record low. The first quarter of 2021 has seen three transactions complete, a positive increase quarter on quarter. Milton Group purchased Tower Bridge Quarter in March for a price of £14.3m at yield of 5.89%. The second investment transaction that completed was at 133-135 Great Suffolk Street whereby Circle Residential, a UK Prop Co sold the building with vacant possession in March to the London Taxi Drivers Association (LTDA) who will use the building for their own occupation. The final transaction was the sale of 27 Southwark Bridge Road to The Christian Community Centre at a price of £800,000. Transactions therefore totalled £28.1m for the first quarter of the year, considerably below the 10 year quarterly average of £274m.
Prime Yields remains at 4.50%, although we do think a price adjustment is inevitable with pricing for prime assets likely to sharpen in the coming months once appropriate opportunities are brought to the market. The lack of stock is certainly hampering the recovery of the market and the South Bank needs a wider pool of both buyers and sellers. However, risk appetite remains very low and is unlikely to change in the short term with many investors targeting core or core plus opportunities. There are several buildings that exchanged towards the end of 2020 and we hope to be reporting on the completion of these sales in the second quarter of the year.
For further information please do get in touch with either Ann Ibrahim or Rupert Cowling.