In its National Office Market Briefing 2017, LSH highlighted ONS figures which reveal 9% year-on-year growth in information and communications employment, which accounts for a large part of the TMT industry, over the last year.
Oliver du Sautoy, head of research for LSH, explains: "This growth, coupled with a 60% increase in small businesses (those employing up to 49 people) since 2001, is reshaping the office market. Key towns and cities, such as Sheffield, Brighton, Milton Keynes and Edinburgh, plus the City of London, are expected to lead further growth in the burgeoning TMT sector.
“We need to be aware of the places where growth is expected over the next few years in this dynamic, growing sector as these locations that will be of particular interest to investors.
"Tech occupiers will be an important driver of demand, but technology itself is also reshaping the entire market in fundamental ways. While the number of office jobs has risen, figures show that office stock fell in 2016 for the first time since 1974, when records began.
“Stock has not increased in tandem with employment and it is clear that a fundamental disconnect has opened up. This is clear evidence that technology is promoting efficient use of space. It’s allowed more agile and remote working, freeing up valuable space for staff. Meanwhile, surplus stock has found a ready market via change of use to residential.
“The internet has driven costs of externalising transactions down to such a point that that it has eroded the conventional notion that bigger is better when it come to business size. This is manifesting itself in a number of key ways. The obvious one is that small requirements are becoming more important and landlords will have to increasingly work their buildings to accommodate that demand rather than hope to land the big fish."
Tony Fisher, national head of office advisory for LSH, adds: "The office market will have to adapt to accommodate smaller enterprises, while landlords will have to increase the flexibility of terms over lease lengths and ensure they can adjust to rapid change among employers.
"This step-change in demand is demonstrated by the fact that although UK-wide take-up over the past 12 months was 17% below the record of the previous year, take-up in the sub 10,000 sq ft market was closely in line with that record period. It was the lack of major deal sizes that brought the last 12 month total down: 30,000-50,000 sq ft take-up was down 24% and 50,000 sq ft plus was down 32% year-on-year.
"We expect prime headline rents to rise in 35 markets over the rest of 2017 and 11 markets to remain stable. Oxford is forecast to see the strongest growth from £26.50 to £32.00 per sq ft. Four markets are expected to see falls – the key London sub markets of the West End, City, Midtown and Docklands, (except Southbank which we expect to remain stable). Despite more uncertainty in the market, supply levels are such that there is still room for growth."
Charlie Lake, capital markets director for LSH, continues: "Yields remain stable against a backdrop of a wide breadth of demand.
"Over the past 12 months, 70% of total office space transacted was in London. 77% of this was from overseas investors. Investment by overseas investors increased into the regions, with a diversified appetite leading to a 50/50 split between in town and out of town locations.
"UK institutional investment volumes remained low, and this group was a net seller. However, a significant increase in investment was seen from local authority investors (in excess of half a billion in total net investment).
"LSH analysed over 400 office transactions over 12 months, identifying significant breadth of demand. Notably, 80% of transactions were completed by investors who only purchased one asset in that year.
"We have identified a number of centres where yields remain significantly below their previous cycle peak, yet are experiencing a significant shortage of grade A product. Coupled with forecast rental growth, this affords significant investment opportunities."
To view real-time information on office markets across the UK, visit our OFFICE PULSE or to receive a presentation of the Lambert Smith Hampton 2017 OFFICE MARKET BRIEFING, please contact Donna Rourke firstname.lastname@example.org
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