The broker warns that the amount of surplus second-hand office space coming onto the market--both as as a result of the sector's merger and acquisition activity and of the preleasing of new accommodation--will increase considerably. If the market is facing a downturn, the impact of this release of extra second-hand space could be critical.

Over the past year, 1.5 million sf of second hand space has been released onto the market, and readily absorbed. But the amount of surplus second-hand offices still waiting to be released stands at around 6.5 million sf.

While demand remains high and the rate of delivery of newly-built space remains modest, this increase in second-hand supply provides increased opportunities for both occupation and redevelopment. If and when demand falls, however, the impact of such floor space release will become more critical since the release of space will continue for several years into what could be a weakening market.

This impact may be exacerbated if companies find that headcount shrinks as a result of a downturn in economic activity before they can occupy pre-leased space. This may release even more space onto the market through sub-lettings. DTZ Research estimates that companies currently occupying 7.3 million sf in Central London have contracted to occupy 10.3 million sf of new space.

DTZ's head of business space, John Forrester, says: 'We are entering a period of caution. While grade A supply will remain at a low level generally for the next three years, it is the release of space from the financial sector which will determine whether the market continues in a relative state of stability and equilibrium'.