The UK market is provided with regular Take-Up statistics by the agency community and this is often perceived to be the definitive measure of occupier demand. However, Take-up is misleading, why? Because Take-Up ignores vacancy and can only ever be a positive number which only tracks new and renewed leases – even leases signed years before occupancy. Investors require something more meaningful.
Net Stock Absorption (“NSA”) is a far more accurate measure of total leasing activity as it excludes forward commitments and nets out vacated stock. The chasm between the two methodologies is glaring in 2016, where Take-Up of Central London offices was positive 12.1mn sq ft, but NSA over the same period actually fell by 3.0mn sq ft - meaning tenants vacated 3.0mn sq ft more than they occupied.
We have developed a statistically robust model that explains historical net absorption employing variables such as stock, rents, employment growth and space per employee. Unsurprisingly, employment growth and space per employee play an important role in explaining NSA.
Had there been no Brexit, our forecast for NSA would have been positive 2.4mn sq ft. We can call this the “opportunity cost” to office demand due to the referendum. In reality, tenants gave up 3.0mn sq ft more than they leased in 2016. The total 2016 price tag of Brexit when you add opportunity cost to actual cost was a loss of 5.4mn sq ft of NSA. If you add in the above 2016 figure to the additional negative 800k sq ft NSA that occurred in the first half of 2017, the number rises to almost negative 6.2mn sq ft. Hardly the bright picture painted by Take-Up.
Seaforth’s model forecasts a challenging medium term with a further negative NSA of 600k sq ft for 2017 - 2020. Since Brexit, Central London NSA has been negative despite sustained employment and GDP growth. We believe this unusual behaviour is the equivalent of, “demand parking at the door” as businesses avoid or defer leasing decisions and monitor Brexit negotiations. The difficult question is what happens to demand from here – does it remain “parked”, shift overseas, or does it “wilt on the vine” as businesses become more efficient, require less space, and/or operate at a higher employment density? A wide range of outcomes are possible that willl inevitably reflect a combination of these scenarios.