JLL – Strong Q3 Western Corridor performance highlights development opportunities
The Western Corridor office market saw high take-up levels of 720,000 sq ft in Q3 2018
The Western Corridor office market saw high take-up levels of 720,000 sq ft in Q3 2018, according to JLL, taking the total amount of space transacted in the first three quarters of 2018 to 1.69m sq ft. This figure, driven by a number of major deals, represents a significant increase of 56% on the corresponding quarter of 2017, with the year-to-date showing a 39% jump on the previous year.
The Western Corridor's investment market also saw a marked quarter on quarter increase with £780m transacted in Q3 2018, which is up 80% on Q2 2018. JLL cited that total investment volumes for the year now stand at £1.49bn.
JLL's research found that the Q3 2018 take-up was characterised by occupiers' demand for high quality space, with over 95% of transactions on Grade A space. The quarter also saw the average deal size increase from 15,500 sq ft in 2017 to 38,000 sq ft due to a number of large transactions. Looking towards the end of 2018 demand remains robust although political uncertainties are feeding through to occupier's requirement for flexibility and deal momentum can be slow.
Whilst demand for the best space is evident, supply levels are falling and JLL highlighted that the development pipeline continues to be eroded. It has consistently halved year on year, from a peak of 3.1m sq ft at H1 2016, to 1.4m sq ft at H1 2017 with only 790,000 sq ft currently on site and no new developments committed to post 2020.
James Finnis, head of south east office agency at JLL, said: "Looking towards Q4 2018 we expect to see further take-up focused on Grade A space. We are forecasting take-up will exceed the 2017 figure and we anticipate an end year figure of over 2.1m sq ft.
"With demand continuing to take the best space and the replacement rate falling below 1% of total stock there is a growing future supply risk. Our net absorption forecasts are showing a pinch point coming – focused on 2020 and 2021. As the take-up figures demonstrate the market retains strong fundamentals which provide a firm business case for speculative development in locations which can attract talent and deliver the environments that occupiers and their staff want. A number of towns across the region present real opportunities for developers and investors to capitalise on the demand for quality space and to address the supply gap in 2020 and beyond."
JLL highlighted that the Western Corridor investment market recorded volumes of £780m in Q3 2018, a rise of 80% from the previous quarter of 2018. Brockton and Landid's sale of their portfolio to Spelthorne Borough Council for £285m represented the largest transaction as investors continue to vie for the region's prime assets. Domestic buyers remain the most acquisitive investors accounting for 76% of the transactions completed so far in 2018, but this is being redressed and overseas investors were increasingly active in Q3 2018 and are expected to keep targeting the Western Corridor and wider south east market before the end of the year.
Angus Minford, director of capital markets at JLL, said: "Echoing the trend currently being played out in the leasing sector we are experiencing an acute lack of available prime product. Whilst there is a significant wall of money targeted at the region it remains a risk-off market and therefore it is the prime and core assets that are attracting attention, of which there is limited supply. We expect to see investment volumes exceed £2bn by the end of the year and this investor demand, along with sustained occupier interest should encourage the next wave of speculative stock."