One third of current demand in the London office market is likely to stay put rather than move, as regears become an increasingly key structural feature of the London market, Knight Frank has reported.
In a detailed dive into the trend at the Knight Frank London office breakfast at Nobu on Monday (4 February) Laura Beatson, a Partner in the London lease advisory team, said: "We are seeing more renewal and regear activity than ever before. It’s an opaque part of the market but our team alone transacted on 2.5 million square feet of regears across London last year."
Beatson said that figure amounted to 44% of all Knight Frank transactions and includes 3 of the most significant market renewal deals, including EY recommitting to 400,000 square foot at 1 More London Place on the Southbank until 2040, and the London Stock Exchange recommitting to 240,000 square foot at 10 Paternoster Square.
The adviser said regears now account for 39% of all London office transactions, with 1.7 million square feet under negotiation. For requirements below 40,000 square foot, 25% are likely to stay put. But larger occupiers are much more inclined to remain in situ, with 46% of those requiring more than 100,000 square feet now likely to stay put, reflecting the growing complexity and cost of relocating large footprints.
Looking ahead, supply constraints are set to reinforce this trend, KF says, with 65% of occupiers with lease expiries between now and 2030 expected to be limited by available space, making regears a larger feature of the market.
Beatson said it was important to highlight that regears are not a negative for London. "We’ve moved beyond the short-term defensive regears that we saw post Covid and today, strategic, well advised regears create value for both landlords and occupiers."
KF says renewals are being driven by market dynamics and operational realities. Beatson said: "ESG and amenity drove relocations in recent years, but today any move has to be sold to the CFO, not just the staff ... a move has to facilitate business transformation.
"At the same time savvy owners understand that retention is not just about offering a cheap deal and they are investing in amenities and the occupier experience. Last year nearly 20% of regears involved landlord works."
KF says that its data shows a number of other nuances.
The age of a building materially shapes both the mindset of the parties but also the structure of a regear, it says.
KF says a 10-year-old building provides the clearest opportunity as it is likely to have some amenity and obsolescence is less of an issue. Here occupiers are making market commitments and rents show small discounts to new and refurbished space.
20-year-old buildings are more challenging as they are nearing end of life. "Where regears happen here, they tend to involve proactive strategies with significant landlord capex," Beatson says. In return occupiers are then often committing for the long term at full market rents.
In the middle is the 15-year old-building which is not competitive with new builds but has enough life left in it to prevent the landlord from committing to a full refurbishment. KF says regears in this case are generally shorter term commitments and at discounted rents.
KF says expansion is a major catalyst for regears, adding that if an existing landlord can meet their occupier's expansion needs, there is an incentive for them to stay.
Even where occupiers are not immediately expansive, they are future proofing and KF says it has seen an almost 300% increase in the use of First Rights of Refusal in regears over the last 12 months.
The adviser says that when landlords go further and proactively create opportunities either now or in the future, it opens the door to "broader, more strategic conversations ahead of a lease event". Examples of where this has led to long term retention is the recent renewal with Howden.
Rental growth is also pulling regears forward. Beatson said: "Occupiers want cost certainty. Landlords, meanwhile, want exposure to upside. The result is more creative deal structures from fixed rents to base rents with kickers linked to landlord works to day 1 rent reviews (RRs) with minimum uplifts."
As such KF says regears offer a large opportunity for landlords and occupiers. "65% of occupiers with expiries between now and 2030 need to stay put in order to not outstrip upcoming supply," Beatson predicts.
Beatson said: "We think regears are now a structural feature of the London office market and present an opportunity for both landlords and occupiers."