Between 2020 and the end of H1 2023, Cushman & Wakefield recorded 85 examples of occupiers signing to take more than 50,000 sq ft of office space in Central London. Of these, 42 took their office space as pre-lets – 15 of which are known to have had the option to expand further included in their leases.
While some of these options are still pending/not taken, more than half have already been taken up, reinforcing why it is worth landlords offering this growth flexibility in agreements.
The expansion and contraction of space requirements has been discussed at length since the post-pandemic return to the office. Earlier in the year, Cushman & Wakefield’s 2023 London Moves report, which analyses relocation trends of Central London office occupiers revealed that, overall, the market was in expansion mode last year. More occupiers chose to increase rather than contract on their former office space, equating to an overall net expansion of approximately 2.5 million sq ft (for all deals over 5,000 sq ft).
However, businesses with the largest requirements need to agree leases well in advance of their lease event in order to secure a building that meets their requirements, both from a practical point of view, in terms of size to accommodate employees, but also with regards to building attributes and sustainability credentials.
When agreeing leases in advance of upcoming lease events, occupiers are often unable to truly determine how their requirements may have shifted upon move-in dates, and the need for flexibility is increasingly a key requirement for those seeking space in the post-pandemic market.
Building in option space into lease negotiations has increasingly been seen as beneficial to the occupier and has come to the fore in recent years. Regardless of whether occupiers have been moving to premises that are larger or smaller than their previous office, option space has also played a role in adding to the overall space taken in relocations.
The greater return to office since the pandemic, both optional and mandatory by employers, is one of the key drivers behind the requirement for more space. However, expansion space does not necessary mean an increase in desk numbers. The increased area can often relate to a greater proportion of collaboration space, in order to attract employees back into the office and also to better reflect the work activities being undertaken at the office.
While this flexibility is great news for occupiers in the market, it does create a risk for landlords as there is potential for option spaces to not be taken, leaving vacant floors that need filling prior to, or upon, development completion.
However, what is evident is that when option space is offered, very rarely is it not taken. Moreover, in those circumstances where it becomes available again, there is likely be strong competition from other occupiers seeking Grade A offices as the best quality space in new developments remains highly sought after. This, in turn, will put continued upward pressure on rents and further extend the rental gap between the very best buildings and the rest of the market.