Western Corridor office market improving says Jones Lang LaSalle8th October 2012

The forecasted improvement in the Western Corridor office market in H2 is being delivered with strong take-up in Q3 and continued rental growth in the West London market

James Finnis, Head of South East Office Agency at Jones Lang LaSalle said: "The Western Corridor office market is showing real signs of improvement. Take-up has increased, Grade A supply is falling and rents are growing in many locations although this is focused in the West London Market. The development pipeline is limited and the schemes which are coming through are dotted around the wide geography of the Western Corridor resulting in a number of holes in the pipeline. Demand, driven by net growth requirements, increasing clustering particularly from the Oil & Gas sectors and M&A activity is having an impact on the Grade A supply profile which continues to fall. Stock selection by investors and developers is crucial but there are some real opportunities to take advantage of a market which we are forecasting will see sustained growth." 

Take up

The Western Corridor has performed well during Q3 with take-up increasing by 49.2% q-on-q and by 35.8% on the same period last year, totalling 1.5 million sq ft y-t-d. The 816,692 sq ft transacted is 60% above the 5-year quarterly average (510,230 sq ft) and was fairly evenly spread between the West London & Thames Valley market. Take-up in the Western Corridor was dominated by a number of notable deals, including the 114,000 sq ft deal to IMG Worldwide at 5 Longwalk, Stockley Park and the acquisition of 139,239 sq ft at 300 South Oak Way, Green Park by Huawei Technologies. The 5-year take-up average equals 2.2 million sq ft, and looking ahead, if Q4 repeats the performance of Q3 we will see take-up broadly in line with the average during 2012.

Supply

Supply has continued to stabilise over the Western Corridor as a whole with12.9 million sq ft available, down 2% on last quarter. West London has seen the greatest fall in total supply, down 5% q-on-q. The level of Grade A space continues to be eroded with the Grade A vacancy rate for West London falling a further 30 basis points to just 2.6%. In contrast, the Thames Valley Grade A vacancy rate moved out 20 basis points to 8.6%.

Demand

There continues to be strong levels of active named demand in the Western Corridor which will place further pressure on those centres with shortages of Grade A space. At the end of Q3, circa 3.4 million sq ft of named requirements were active in the market. And there remains a real range of occupiers searching for space from a variety of sectors.

What is going to drive demand over the next few years?

• The Western Corridor has seen and will continue to see infrastructure improvements, which will enable occupiers to provide access to their skilled workforce
• A large percentage of the Western Corridor stock is no longer fit for purpose, it does not provide what occupiers want and with 2018 fast approaching, poor space with a low EPC rating will be vacated which will drive relocations
• Consolidation and M&A activity continues to be a key driver for take-up in the Western Corridor; although this can be a double-edged sword with Grade B accommodation being released as a product of relocation to new space
• Clustering
• Net growth requirements

Vacancy rates and Development pipeline

The development pipeline remains constrained. During 2013, 537,220 sq ft is due to complete on a speculative basis across the Western Corridor as a whole, demonstrated most recently by Aberdeen Asset Management committing to speculatively develop 57,000 sq ft at Pine Trees in Staines and SEGRO to E2 (50,000 sq ft) at IQ Winnersh. Beyond this there is limited space in the pipeline that is likely to start on a speculative basis.

Even with these schemes, the total on site development pipeline is only just over 800,000 sq ft in a market of 85 million sq ft – this represents a replacement rate of just 0.9% where the natural replacement rate should be nearer 1.5 to 2%. The wide geographical area of the Western Corridor is creating large holes in the pipeline which will lead to rental growth in certain undersupplied centres and greater investment opportunities going forward.

Occupier preference for the last 3 years has been focused on town centre locations, particularly in West London. However, reducing availability in West London particularly for larger units is encouraging occupiers to consider alternative locations. Stockley Park has had a renaissance in fortunes and vacancy rates have fallen from the high of 45% back in 2004 to approximately 11%.

Rents

Average prime rents in West London continue to show growth with upward pressure in Chiswick and Hammersmith during Q3, seeing the average West London rent increase to £32 per sq ft. In contrast, the Thames Valley recorded the first fall in average prime rents since Q2 2010 with a marginal fall in rents in Camberley impacting on the average and falling by 0.6% to £24.50 per sq ft.

Looking forward, we are forecasting continued sustained growth over the next five years with rental growth peaking in 2013 recognising the supply/demand imbalance and the lack of stock currently on site. Hammersmith will lead the way reflecting the limited supply and continued demand. We are also forecasting that Staines will be an outperformer with its proximity to Terminal 5 Heathrow remaining a key selling point.

What are we forecasting for 2013?

• Take-up by the end of this year will be 2.25 million sq ft reflecting the five year average – we are forecasting a similar level in 2013 with a continued focus on the best space
• Grade A supply will fall and the limited speculative development pipeline will not replenish what is being let
• We will see further refurbishment and speculative development activity in limited centres
• There will be rental growth in West London but also beyond into the Thames Valley towns which investors have shied away from over recent years
• Building obsolescence and the impact of The Energy Act is going to encourage occupiers out of existing space
• Infrastructure improvements will continue to enable sustained growth in our market