JLL: office supply squeezes will drive rental growth in London and the Big Six

Based on known requirements and a potential post-Brexit bounce, demand is unlikely to fall back in 2020, says JLL. This could lead to a surge in both rents and pre-lets in many markets as the year progresses.

In some locations, such as Edinburgh and Leeds, it is no exaggeration to talk of a supply crisis; in others, such as the City of London and Manchester, the sheer expansion in demand suggests the relatively high level of new build will easily be absorbed. Indeed, given the wider dynamics, there is likely to be a strong uptick in construction activity over 2020 – although Brexit-related caution will stop the market from becoming overexuberant, predicts JLL.

As the retail sector changes and e-commerce continues to grow, the challenges of getting goods to consumers, particularly in a city such as London, will become ever more complex. One implication is that demand for urban logistics will continue to grow – a sector in which supply is highly constrained. There could even be some downward pressure on yields for certain assets, but the main effect will be on rental growth – with over 5% expected for inner London. Meanwhile, developers will try to provide more supply in such locations in innovative ways.

Following ProLogis’s recent purchase of Ravenside Retail Park in Edmonton, there will be more interest in incorporating logistics into suburban shopping centres. In 2020, construction work will also start on London’s first multi-level/multi-storey development since the completion of the X2 building in 2008. Despite all the headlines, the flex market will continue to expand in 2020 – but with different business models at the forefront.

New operators will still be looking to enter the UK market – in particular US providers with a focus on London. The main theme will be the emergence of new business models as the industry matures. Management agreements and white label products designed for landlords will become more significant themes. These will help landlords consider how they can compete and bring flexibility into their own spaces.

Meanwhile, they will be less willing to lease to operators, given concerns over both longer-term viability and competition. Property consultants, such as JLL, will increasingly offer advisory services to landlords in this area. However, there is some good news for operators too: with WeWork unlikely to be in expansionary or desk rate-cutting mode, profitability is likely to improve.

james.wallace@realassetmedia.com