It’s getting cheaper to occupy office space, but not in Oxford

Photo shows: Oxford's Jam Factory
Oxford’s Jam Factory After[2]

Property advisers Lambert Smith Hampton’s latest annual Total Office Cost Survey (TOCS), reveal that the average outlay of occupying office space in the UK fell by 1.3 per cent over the 12 months to June 2020 for new build accommodation and 1.6 per cent for 20-year old buildings. But not in Oxford.

While total costs fell slightly on an average basis, there were notable contrasts between specific locations. With regard to new buildings, only three of the 54 surveyed locations saw growth in excess of two per cent over the past year. Oxford saw the sharpest increase, with occupier costs rising by 6.4 per cent, followed by Manchester (3.9 per cent) and Cambridge (2.4 per cent).

This is only the second time costs have fallen in the survey since the global financial crisis in 2008 and contrasts sharply with the 3.6% increase in costs in 2019.

But it’s not lower rents driving down costs, but lower costs of furniture and insurance. Net effective rents actually increased by 0.8 per cent in the year to June 2020, compared with 0.1 per cent average growth recorded in the preceding year.

In each of the above cases, upward shifts in prime rents were at the root of the overall increases in cost. In Oxford, the arrival of the Jam Factory, a high quality refurbishment in the city centre, propelled prime new-build rents to a new high of £47.50 per sq ft in 2020, a jump of 19% on the previous level.

Meanwhile, at the other end of the scale, five locations saw total occupier costs in new buildings slip by more than four per cent over the year to June 2020. Notably, the main fallers were all located within Central and West London, with downward movements driven by a softening in headline rents and/or rent free incentive packages due to a relative abundance of supply.

The gap in costs between the UK’s principal regional cities and central London has narrowed from an all-time high in 2016 for the fourth successive year, reflecting the continuation of rental growth in the UK’s major regional cities, alongside relatively stable rents in the capital.

Cambridge remains the UK’s most expensive location outside London, having moved ahead of Maidenhead in 2019. The university city has seen several successive years of strong rental growth, with annual costs in a prime new building amounting to £9,350 per workstation.

Oliver du Sautoy, Head of Research at LSH, said: “While the fallout from COVID-19 severely impacted the UK economy during the first half of 2020, it is yet to be clearly reflected in occupancy costs. However, the market is moving into a period of possible contraction and so we may well see fluctuations in rental levels in due course driven by an increased volume of surplus space, or ‘grey space’ coming back to the market.

“In the near term, occupancy costs for buildings both new and old may reduce on the back of lower demand, reflecting reduced headcounts and surplus tenant space hitting the market. However, with greater acceptance of flexible working post lockdown, a growing occupier focus on quality over quantity in the future indicates that cost reductions will be most clearly seen for older, secondary office buildings.”

Ryan Dean, National Head of Office Advisory at LSH, added:

“Given that most businesses’ priorities are primarily focused on maintaining cash flow during this challenging period, office costs are going to come under increasing scrutiny. ”

TOCS is the most definitive independent survey of its type, with cost data supplied by LSH and leading industry suppliers.