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New CoStar National Office report reveals strong upturn in net absorption and record low vacancies at the start of 2018

By Richard Yorke - Monday, February 05, 2018 14:47

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CoStar’s new National Office report, which analyses occupier and investment trends across 64 markets and 486 submarkets, reveals a strong upturn in net absorption and record low vacancies at the start of 2018.

Occupier demand for offices - in terms of net absorption - accelerated in 2017. Nationally net absorption totalled nearly 8.3m sq ft in 2017. This was much higher than in 2016 (3.3 million sq ft) and the highest since 2014 (12 million sq ft). This reflected stronger-than-expected economic performance in 2017, and continuing growth in employment which is at record levels. It was also supported by occupiers moving into buildings following pre-lets concluded in preceding years (Amazon into Principal Place in London was a notable example). Business services, technology, and creative industries helped drive demand. Cambridge, Oxford and Bristol were notable beneficiaries. Relocations out of London, notably by public sector organisations such as HMRC but also back/mid office operations in banking, also boosted regional demand. Manchester and Birmingham were notable recipients.

London posted the greatest net absorption in 2017, at over 3 million SF, a marked increase on 2016. Technology and creative industries continued to expand, especially in fringe and emerging locations. However, the City experienced a steep fall. Financial services has continued to reduce headcount and trim costs in the context of structural changes and the uncertainty around Brexit. The London average vacancy rate increased in the second half of 2017, with the biggest increases in the City.

Nationally absorption last year was also boosted by the proliferation of serviced and flexible office provides, especially in London. WeWork is now one of the largest occupiers in the capital. However, the expansion of flexible office providers may be at the cost of traditional landlords. Vacancies in small and medium sized London offices has increased.

Developers have responded in many parts of the UK. Deliveries ramped up in 2017—totalling around 8 million sq ft—but failed to keep up with demand. The national vacancy rate eroded through the year as a consequence, ending the year below 7%. This is the lowest figure recorded in more than a decade. We expect the national vacancy rate to level off in 2018 and then rise gently through 2019 in the face of new construction. New deliveries and refurbishments should help ease tight regional occupier markets, where vacancy rates are at or close to record lows. Many new buildings, however, are pre-let so the vacancy rate is unlikely to rebound in many regional markets. Conversely, the scale of new buildings in London will likely propel the vacanfcy rate in the capital, and lift the national 4&5 star (prime) vacancy rate as a consequence.

The full report can be downloaded here.

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