We recently read with some amusement and amazement an article in a UK property industry magazine, using research contributed by a UK property company, about a new way we should all be looking at office demand: net absorption. The article stated that “London’s occupiers have vacated the greatest amount of space in 15 years” as “[n]et stock absorption, which is the difference between occupied space from one period to the next, fell to [negative] 3m [square feet] in 2016 – below the [negative] 1.5m [square feet] experienced in 2008. The first half of 2017 saw a further [negative] 800,000 [square feet] of losses.”
Amused, because a trade journal had to spend time defining the only meaningful way to measure office demand, which it seems much of the rest of the world understands. But we were amazed because we have been sharing this information with our investors for a while, including in our last annual meeting, where we stated that recent take-up (which the journal also had to point out “can only ever be a positive number”) overstated actual demand because net absorption was negative. We find it odd that this information might be considered “news”, considering that it is calculable using CBRE data. Mike thought it sounded like one of those dubious advertisements: “This group added – and then subtracted – and the results will astound you!”
But kudos to the property company for bringing this to the attention of the UK market, it’s about time! However, we’d go even one step further: this data did not include in this calculation the impact of serviced office take-up. We do not see take-up by serviced office providers like WeWork or The Office Group as positive net absorption, because they simply act as intermediaries to the ultimate space user (i.e. they are simply transferring tenants from one type of building to another). It’s actually worse than neutral, because serviced office providers fill the same building with more people than does a tenant that directly leases from the owner.
Restating the data cited above, we believe net absorption after adjusting for serviced office take-up even on a one for one basis (excluding the impact of denser space use than typical office), was negative 4.3 million square feet in 2016 and negative 1.6 million square feet in H1 2017, nearly 2.5 times lower than the level seen in 2008. This is a significant amount of net tenant demand being lost relative to space being added, and we believe this fact is widely misunderstood by the UK agency and investing community.