Rise of pre-let in the Central London office market
Pre-letting in Central London is on the rise, as companies look ahead to secure their future real estate needs in an undersupplied market.
An agreement between a potential tenant and a developer to lease a building either before or during construction, ‘pre-letting’ gives owners the benefit of de-risking their position. It also allows tenants to secure their preferred real estate and, in some cases, to have a say in the final condition of the premises.
Of the 2.3 million square feet of Central London office take up in the first quarter of this year, 28 percent was undertaken on a pre-let basis, building on a significant increase in pre-letting volumes over the past couple of years across a number of sectors including media, legal, technology and financial services. At Battersea Power Station, 470,000 square feet of space has been pre-let to Apple. Google, Facebook, McKinsey, Royal Bank of Canada and Sumitomo Mitsui have also pre-let buildings in London.
“Across all sectors, we’re seeing a lot of pre-lets from companies with leases expiring by 2020 and even up to 2023. However, a significant change in this cycle has been that smaller occupiers are now looking well ahead of lease expiry to find and fit out a suitable space,” says Neil Prime, Director, Head of UK Office Agency, JLL. “There is simply relatively little supply of new offices in London at the moment and occupiers are reacting to that.”
Last year, developer Derwent London secured pre-lets with two major consultancy groups – Arup and Boston Consulting – for most of the space in its 80 Charlotte Street development, to be finished in 2019. 45 percent of the 623,000 square feet that the developer currently has under construction is already spoken for.
Despite concerns that ‘Brexit’ uncertainty could deter new business, the demand for office space in 2017 was above the 10-year average, driven by robust expansion across all sectors, especially technology. Global firms including Google, Facebook, Bloomberg and Deliveroo are all establishing new headquarters in Central London.
The booming coworking sector is also impacting supply, with WeWork, London’s largest private office tenant, recently signing pre-lets for 300,000 square feet at Almacantar’s redevelopment of the old Shell Centre and Waterloo and 186,000 square feet at Shoreditch’s The Stage.
As real estate is increasingly seen as a competitive tool by many occupiers, pre-letting is a way of securing that advantage, according to Prime. “Many occupiers reaching the end of their lease in older premises want to pre-let and lock in the right space, because real estate is now a major factor in attracting talent.”
Across Central London, 44 percent of the office space under offer is as yet unfinished, with a busy pipeline of developments running through to 2021. “Therefore a large proportion of that supply will not make it to market and coupled with political uncertainty, many developers don’t have the risk appetite to start new buildings as they don’t know what the market will be like in three years,” Prime says.
This constrained supply, coupled with the consistent demand for office space is likely to create a stable market with steady rents.
For investors, London offices continue to offer stabilised assets – many with long term leases. “We see a lot of global capital inflows and continued safe haven activity and therefore have a pretty stable yield environment, so investors with expectations of higher returns are finding it a challenging environment in terms of sourcing opportunity.” Prime says.
A global trend
Like London, New York City’s office market is experiencing high levels of pre-let activity in massive developments such as Hudson Yard. In Sydney, pre-lets have long dominated the commercial landscape – much of the 3 million sq ft International Towers Sydney was signed to pre-let occupiers.
According to Prime, it’s about locking in the real estate that best fits an occupiers needs “even at this stage in the cycle, even its prices are lower in the future – this is how important the right real estate is for driving business growth.”
Some developers are beginning to collaborate directly with pre-let occupiers to design and build bespoke real estate solutions – Land Securities worked closely with Deustche Bank on the design of a 564,000-square-foot Central London building pre-let for the bank’s headquarters.
This is a trend that we’re likely to see more of, says Prime.
“Looking forward into the mid-term, I think developers may build fewer speculative projects and pre-letting buildings will become more a norm – some with bespoke products for specific occupiers."
“We expect a continued filtering down of two smaller occupiers satisfying the real estate needs by pre-letting, a new dynamic for our market.”