Re-gearing points to deferred demand

• A sharp rise in re-gearing suggests demand is being deferred, rather than eliminated altogether
• Demand for office space is expected to be more qualified, considered and grounded in occupiers’ experiences of the great global workplace experiment

How has the Covid-19 pandemic impacted office demand?

Nowhere has the impact of the Covid-19 pandemic on London’s office market been more clearly seen than on tenant demand, which remained subdued throughout 2020, dipping throughout the course of the year. For reference, at the close of 2020, active requirements totalled 7.55 million sq ft, below the 10-year average of 8.57 million sq ft.

Covid-19 is accelerating trends that were already in train prior to the outbreak, such as agile and remote working, but is demand being permanently reduced? The answer is: it’s complicated.

As we commence 2021, prime headline rents remain relatively stable and steady, as they did throughout much of 2020. During Q3 last year, rents in the City core slipped to £70/sq ft and the West End core registered a decline to £110/sq ft, from £72.50/sq ft and £115/sq ft respectively. Rents have held at these levels since.

“Prime headline rental rates are still within touching distance of pre-pandemic record high levels, highlighting the resilience of rents for premium office space.”

This means prime headline rental rates are still within touching distance of pre-pandemic record high levels, highlighting the resilience of rents for premium office space, albeit lease incentives continue to increase.

Demand is being deferred

For obvious reasons, requirement levels have remained subdued, but there is evidence to suggest that occupier demand is being deferred, rather than eliminated altogether. In fact, during 2020 our London Tenant Representation team recorded a 32-fold increase in lease renewals, hinting towards delayed decision-making by businesses.

For 2021, we expect a steady return of demand in the form of new leases. As the year progresses and the vaccination rollout gathers pace and we move toward national herd immunity, which the Scientific Advisory Group for Emergencies (SAGE) believes can be reached by the summer, greater confidence is expected to ensue, with those businesses previously in a holding pattern likely to begin moving forward with expansion and relocation plans that were previously impacted by the pandemic.

“Demand is set to take a flight to quality as businesses seek hub offices that provide a rich workplace experience.”

Demand for office space is also likely to be more qualified, considered and grounded in occupiers’ experiences of the great global workplace experiment.

Read: Brave new world?

And a continued and increasing proportion of that demand is set to take a flight to quality as businesses seek offices that offer flexibility, provide a rich workplace experience and further their ESG goals, thereby increasing pressure on landlords to get into the service layer and/or operational performance of an asset.

So what does this mean for future demand? Our expectation overall is that demand has undoubtedly been curtailed by the events of 2020, but deferred decision-making and a rapid return of business confidence as the government inoculates the population suggests that demand for office space will quicken throughout 2021.

There will however be a sharpened focus on premium office space, translating into a greater divergence between rents for prime and secondary space.

Read: Why prime headline rents are set for continued growth