2019: a year of resilience for London's office market

2019 can best characterised as a year of resilience for London's office market. Resilience in the occupational market and stronger investment activity, particularly once the General Election delivered the clarity many investors have been holding out for.

In the occupational market, total take-up declined to 12.8 m sq ft in 2019, from 14.8 m sq ft in 2018. Positively, activity has remained diverse, with the all important professional services and finance & banking sectors continuing to expand, accounting for a 39% of all activity, followed by flexible offices (18%) and tech (16%).

This diversity in take-up has persisted despite one of the most complicated and divisive political climates in recent memory; a testament to the resilience and attractiveness of London as a magnet for talent, businesses and investors. We explore this in more detail in our 2020 London Report, so please visit www.knightfrank.com/londonreport for more information.

The persistence of expansionary activity amongst occupiers is set against a backdrop of limited options, particularly for larger offices. This is forcing some decision makers to seek out and commit to new space well in advance of lease events. In fact, total availability across London fell just shy of 13 m sq ft as we ended 2019, down on the 14.2 m sq ft available at the end of 2018. This disparity has been a key driver behind the rising volume of pre-lets, which has resulted in falling speculative development completions – these stood at just 27% of all stock completed last year, compared to a long-term average of 57%.

At the same time, for those unable to secure space to suit their requirements, re-gearing remains the only option. This goes some way to explaining the slight dip in take-up, notwithstanding the political uncertainty that has also weighed on the minds of some businesses, at least up until the General Election in early December.

Investment activity rebounds

In the investment market, with the removal of one of the few confidence barriers – political uncertainty – following the General Election, we recorded a flurry of deals, which lifted the Q4 2019 investment turnover total to £4.6 bn; a 94% increase on Q3 2019. 

2019 as a whole registered investment deals totalling £13.9 bn. While this is down on 2018, London has still emerged as the number two destination globally for commercial property investment, behind Paris; a stunning achievement given the political backdrop for much of last year (RCA). And 2020 looks set to be a bumper year, with our Global Capital Tracker suggesting some £48.4 bn is waiting in the wings around the world for deployment in London’s office market. The challenge? Just £2.3 bn worth of stock is currently available, excluding stock that is under offer, spread across 40 assets.

The availability of stock aside, returns from London’s office market still outperform most other European cities and indeed many other global gateway cities. While this may be true, the weight of capital vying for a slice of London, coupled with the strength of rental growth forecast across the city means that prime yields will come under pressure this year, compressing by 25-50 bps in both the City and West End, from 4.00% and 3.50% at present, respectively.