60 Second Property Digest – London office market report

The London Office Market Report provides a quarterly update on the performance of leasing and investment activities into Central London Offices.

London offices remain resilient

Take-up across London was 3.19m sq ft, a quarterly increase of 20.5% and above the long-term trend of 3.08m sq ft. Almost two-thirds of the space leased was for new and refurbished space – a marked increase from just below 50% in 2022 Q1. Unlike the start of the pandemic, where demand was driven by a ‘flight-to-quality’, the rise in new and refurbished take-up this quarter was due to the completion of large deals that have been under-offer for an extended period.

Slight rise in availability and future supply is modest

Availability has risen slightly to 20.41m sq ft from 20.1m sq ft in 2022 Q2 and reflects a vacancy rate of 8.3%. Although this is nearly 5m sq ft above the long-term average, excess vacant floor space is a greater issue in the City & Southbank compared with the West End. Speculative completions due in the next six months of 584,000 sq ft are the main factor driving the increase. Currently, 57% of available space in London is new and refurbished, however, in the City & Southbank this is 62% and above the average for London. Whilst in the West End this ratio falls to 48% and below the average for London. The future pipeline remains modest at 15.14m sq ft with a delivery timeframe of 2022-25.

In comparison to long-term average levels of take-up for new and refurbished buildings, the potential under supply of best-in-class buildings is 8.69m sq ft.

Strong occupational demand in West End

Across London there is a divergence in performance between the City & Southbank and West End markets. Although take-up rose by 12.7% in 2022 Q2 in City & Southbank, it remains below the long-term quarterly trend for a third successive quarter. In contrast, take-up in the West End has risen in-line or above trend for a fourth successive quarter and has been combined with falling levels of availability.

The strength of demand and lack of available prime buildings has led to a rise in the rental tone across the West End. We have raised our assessment of current prime rents in nine West End submarkets. We have also raised our prime rent in Canary Wharf to £52.50 per sq ft amid increased demand for prime buildings with negotiated rents above £50.00 per sq ft. We have kept prime rents in the City & Southbank and rent-free periods in all markets unchanged.

As expectations for London and UK economic growth have been revised down in recent months, we have lowered our rental growth forecasts across London over the next five years. Our forecast annual average shows stronger growth in the West End submarkets. However, growth is front-loaded in 2022. Between 2023-26, rental growth is supported by low levels of available prime space and a modest future pipeline. Whilst occupier demand during this period is expected to rise in line with the improvements to GDP growth.

In the West End Core we expect average annual growth of 1.5% between 2022-26 and 1% in the City Core.

Prime yields rising in the City

The investment market has been especially strong in recent quarters. In 2022 Q2, transactions in London offices fell from £5.86bn to £3.18bn. Sentiment has been impacted by rising interest costs with debt no longer accretive to income returns.

As a result, we have raised prime yields in the City & Southbank by 25bps to 4.00%. Yields in the West End and Docklands & Stratford have remained stable at 3.25% and 4.75% respectively. Prospects for further interest rate rises and a weaker economic outlook will likely place upward pressure on yields. However, this is offset to some extent by sterling’s depreciation making capital values attractive to overseas investors, whilst the potential to hedge against inflation will intensify demand for best-in-class buildings.