It was a classic boom-to-bust story. In 2000, the Thames Valley office market enjoyed record take-up levels thanks largely to rapidly expanding technology, media and telecoms (TMT) occupiers gobbling up space. However, within 12 months the market had started to crumble, with vacancy rates eventually hitting an eye-watering 13% by the end of 2002.
In early 2001, Property Week reported on the impact the dotcom crash was having on the Thames Valley market. The feature, headlined 'Is IT all over?', detailed how vacancy rates were starting to rise rapidly as companies such as Cisco, NTL, Motorola and Nortel Networks looked to offload surplus office space.
London wasn't immune from the fallout. By the end of the second quarter of 2002, the vacancy rate in the capital had shot up to 20%. The bloodbath was caused in large part by these aforementioned tech businesses expanding too quickly.
As FPD Savills director Jeremy Bates noted at the time: "In 1995, Cisco was a small company that no one had heard of. Then three years later it took one of the biggest pre-lets of all time."
It took a good two years for the Thames Valley office market to start to pick up, with the recovery more steady than stratospheric. Today, the TMT sector is a vital contributor to the Thames Valley and the capital's office market, accounting for 14% of overall office occupation in central London, according to figures from Colliers International.
Since the depths of the dotcom crash, the tech sector globally has bounced back spectacularly. Over the past few years, a number of tech start-ups have achieved 'unicorn' status--a valuation of $1bn ([pounds sterling]686m) or more--with some even earning the rarely awarded 'decacorn' moniker (a company with a valuation of $10bn or more).
However, there is a problem looming large on the horizon. Many Silicon Valley commentators reckon we're in the middle of a tech bubble. They feel the market is in danger of overheating and recent events appear to support these concerns. The amount of seed funding start-ups have received has started to slow, there have been fewer IPOs and those that have listed have received lower-than-anticipated valuations.
In addition, some big tech companies have started slashing their global workforce--Intel announced 12,000 redundancies last week, and Twitter and IBM have also significantly cut workforce numbers in the last 12 months. And there are other warning signs. The latest set of earnings results from Microsoft, Alphabet (the parent company of Google), Apple and Twitter have been disappointing.
So are we in another tech bubble? And if it does go pop, how severe is the fallout likely to be this time around? Although there are parallels between the tech sector around the turn of the millennium and today, one Silicon Valley veteran says that the atmosphere now is completely different.
"In 1999-2000, people were insane," he recalls. "Investors were backing companies that had no concept of revenue and were haemorrhaging cash. Some of the stuff was cloud cuckoo land. People were talking about these companies and trading them, but no one was using their products and services."
His view is shared by a UK-based venture capitalist who invests in tech start-ups. He believes that at the moment people are merely "letting a bit of air out of the balloon", a radically different situation to 2000.
"A lot of the ideas in the dotcom boom were in the right direction, but the technology wasn't there and the market wasn't there," he says. "There was a lot of investment tourism from people who didn't understand early-stage investment in start-ups. I don't think it's the same story again as the technology is much more mature."
Although he agrees that in the US there has been some price inflation when valuing tech start-ups, he says those mispriced companies are starting to get marked down. He adds that Europe is more immune to any storm clouds gathering over Silicon Valley.
"In the US, some things have started to come down and rounds have been a bit more punitive, but in Europe we haven't really seen any major changes and investors haven't been as 'spendy'. My friends who work in the Valley say it's not nearly as catastrophic as people perceive it to be."
Those words will no doubt be comforting to landlords and agents who are active in the Thames Valley and central London office markets, which are still heavily exposed to the TMT sector. Over the past few years alone, the amount of space taken by TMT companies in central London has risen rapidly. According to Colliers' figures, TMT occupiers accounted for 22m sq ft of space in 2009. Today, that figure stands around the 31m sq ft mark. In other words, it has grown by just shy of a third in the space of seven years.
Separate research from JLL recently found that some 45,000 new tech companies have been established in London over the past five years--a rate of one every hour.
"Media and tech [M&T] has exploded onto the London office scene over the past five years with net growth in occupation reaching 5.4m sq ft," says Colliers director of research and forecasting Guy Grantham. "While net growth by all other business sectors combined was nearly 2.5 times these levels, M&T growth still accounted for 30% of occupational uplift over that time period."
He adds that the West End market has benefited the most from this influx, with M&T accounting for 29% of take-up in 2014, rising to 45%--more than 2m sq ft--in 2015.
"Across the London office market, the true impact of tech demand has been felt in physical occupation of space and absorption of stock," continues Grantham. "While other sectors have focused more on repositioning and upgrading their existing product, M&T have been firmly in expansion mode, with deals recorded in excess of 100,000 sq ft translating into absorption of 1.9m sq ft."
While recent tech take-up in the Thames Valley has been strong--Grantham says that in the last 12 months tech take-up stood at around 450,000 sq ft thanks to deals by Thaies, Gartner and Service Now, versus an annual average of around 200,000 sq ft since 2006--it's nowhere near the level it reached at its peak.
"Despite the jump, tech still only accounted for less than 20% of total demand," according to Grantham. "In fact, since 2006, tech has only accounted for 13% of total take-up in the Thames Valley."
Ben Burston, head of UK offices research at JLL, agrees that the occupier make-up in the Thames Valley office market has changed significantly since the early 2000s.
"While the technology sector is a vital business cluster within the Western Corridor, the office market is less exposed to the sector than it was 15 years ago in the aftermath of the dotcom crash," says Burston. "Back then, demand from giant US firms drove the market with soaring levels of take-up from 1997 to 2001, averaging 5m sq ft across the Western Corridor over this period, peaking at 8m sq ft in 2000."
This time around, however, the market is very different. Despite the recent growth of the tech sector, the nature of demand has changed, with more of an emphasis from occupiers on the quality of space rather than quantity. "So the recent expansion of the sector has not resulted in the same quantum of office requirements, and take-up and rents have not been driven to the unsustainable highs we saw in the late 1990s," says Burston.
As a result, the Thames Valley market is less vulnerable today to a downturn in demand from the tech sector than it was 15 years ago. On the flip side, as many tech occupiers, and especially start-ups, have increasingly been drawn into the capital to areas such as east London and the Silicon Roundabout, London could well be the biggest loser if and when the bubble bursts.
Grantham says that at present there are three active requirements across London from M&T occupiers--one for Apple and one for ITV (the third occupier is unnamed)--that combined would absorb around 1m sq ft of office stock.
"These levels of absorption are becoming increasingly critical to the London office market, even ignoring the historically low vacancy across the majority of submarkets," explains Grantham. "The significant reduction in levels of demand from the M&T sector would be a major blow to the London office market going forward."
He reckons the locations likely to be worst hit by a collapse in demand from tech occupiers would be non-core and emerging areas such as Waterloo, Canary Wharf, Croydon, Stratford, White City and east London. "Up to 7m sq ft of offices could be delivered in these locations up to 2020 and M&T occupiers will be featuring very strongly on potential occupier target lists," says Grantham.
Fall in take-up
Colliers research shows M&T take-up has already fallen away sharply in 2016 to date with just 13%--or 150,000 sq ft--of demand from the sector, although transaction levels are still in line with the 10-year average.
"An impact is being felt in traditional media locations, such as Fitzrovia, Bloomsbury, Soho and Covent Garden, which are seeing at best static levels, at worst reductions in M&T occupation," says Grantham. "In total, M&T occupation by those sectors in these traditional locations has fallen by 400,000 sq ft since 2011."
Of course, some of that reduction can be attributed to M&T occupiers considering non-core locations to satisfy their office needs, but these numbers might also have been affected by tech companies starting to rein in requirements. There's an ongoing heated debate in the Silicon Valley about whether or not we're on the brink of the tech bubble bursting. Some commentators are adamant that what we're seeing is a minor correction. Others believe that an almighty crash could be on the cards.
If the Silicon Valley bubble does eventually burst, the impact will inevitably be felt in the Thames Valley and all the more so in London. And although it's unlikely that the fallout this time around will be anywhere near as severe as it was in the early 2000s, it's also unlikely that the market will escape unscathed.
To read Property Week's 2001 article on the impact of the dotcom crash on the Thames Valley office market, visit bit.ly/DotComCrash