The results of our latest annual Total Office Cost Survey (TOCS), published 25 September 2020, reveal that the average outlay of occupying office space in the UK fell by 1.3% over the 12 months to June 2020 for new build accommodation and 1.6% for 20-year old buildings.
This is only the second time costs have fallen in the survey since the global financial crisis in 2008 and contrasts sharply with the 3.6% increase in costs in 2019.
According to the findings, the main drivers for the overall drop in average costs were attributable to items such as furniture and insurance, rather than an actual decline in net effective rents, which actually increased by 0.8% in the year to June 2020, compared with 0.1% average growth recorded in the preceding year.
Oxford sees strongest cost increase
While total costs fell slightly on an average basis, there were notable contrasts between specific locations. With regard to new buildings, only three of the 54 surveyed locations saw growth in excess of 2% over the past year. Oxford saw the sharpest increase, with occupier costs rising by 6.4%, followed by Manchester (3.9%) and Cambridge (2.4%).
In each of the above cases, upward shifts in prime rents were at the root of the overall increases in cost. In Oxford, the arrival of the Jam Factory, a high quality refurbishment in the city centre, propelled prime new-build rents to a new high of £47.50 per sq ft in 2020, a jump of 19% on the previous level.
Meanwhile, at the other end of the scale, five locations saw total occupier costs in new buildings slip by over 4% over the year to June 2020. Notably, the main fallers were all located within Central and West London, with downward movements driven by a softening in headline rents and/or rent free incentive packages due to a relative abundance of supply.
West End’s relative cost premium continues to erode
The prime core of London’s West End remains by far the UK’s most expensive office location, with the annual cost for a new office in Mayfair standing at £18,877 per workstation, 139% above the UK average and 58% ahead of next most expensive location, the City of London.
However, the gap in costs between the UK’s principal regional cities and central London has narrowed from an all-time high in 2016 for the fourth successive year, reflecting the continuation of rental growth in the UK’s major regional cities, alongside relatively stable rents in the capital.
By way of illustration, the average cost of a typical workstation across the ‘big six’ cities - comprising Birmingham, Leeds, Bristol, Manchester, Edinburgh and Glasgow - stands 38% below London’s Midtown district, narrowing from a peak of 44% in 2016’s survey.
Cambridge remains the UK’s most expensive location outside London, having moved ahead of Maidenhead in 2019. The renowned university city has seen several successive years of strong rental growth, with annual costs in a prime new building amounting to £9,350 per workstation.
Oliver du Sautoy, Head of Research at LSH, said:
“While the fallout from COVID-19 severely impacted the UK economy during the first half of 2020, it is yet to be clearly reflected in occupancy costs. However, the market is moving into a period of possible contraction and so we may well see fluctuations in rental levels in due course driven by an increased volume of surplus space, or ‘grey space’ coming back to the market.
“In the near term, occupancy costs for buildings both new and old may reduce on the back of lower demand, reflecting reduced headcounts and surplus tenant space hitting the market. However, with greater acceptance of flexible working post lockdown, a growing occupier focus on quality over quantity in the future indicates that cost reductions will be most clearly seen for older, secondary office buildings.”
Ryan Dean, National Head of Office Advisory at LSH, added:
“Given that most businesses’ priorities are primarily focused on maintaining cash flow during this challenging period, office costs are going to come under increasing scrutiny. TOCS is a fantastic tool to help identify potential cost savings across a range of metrics and will be particularly useful for those occupiers who are either approaching a lease break or expiry and are no longer tied to a particular location following the shift to more flexible working patterns post-lockdown.”
TOCS is the most definitive independent survey of its type, with cost data supplied by LSH and leading industry suppliers.
Visit our TOCS microsite for more insight.
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