London City office market in review

RENTS CREEP UP AS AVAILABILITY WEAKENS 

Prime rents in the City Core rose to £72.50 psf, from £70 psf in Q1, underpinned by falling availability and strengthening demand levels. Stock levels are now the lowest they have been since the start of 2016, which has driven vacancy rates down to 4.9%. 

Despite this, rent free periods have remained at 24 months on a typical 10-year lease. 

ROBUST OCCUPIER ACTIVIT Y DESPITE BREXIT DELAY

The delay to Brexit has done little to dent demand, with occupier activity in the City rising by 16% during Q2. There were five deals over 50,000 sq ft, compared to four in Q1, with average deal size standing at roughly 13,800 sq ft. 

The largest deal was Brewin Dolphin’s acquisition at 25 Cannon Street totalling 115,000 sq ft. The professional and corporate sectors were the most active, accounting for 35% of total market activity, followed by flexible offices (19%) and financial services (15%). 

Interestingly, despite the strong level of occupier activity, tightness of supply has meant that we are seeing a greater number of lease regears as occupiers are left with little option but to remain in situ. 

This is particularly true for larger floor space requirements, which remain in short supply outside the City Core. 

ACTIVE REQUIREMENTS EDGE UPWARD 

Active demand in the City increased by 19% to 5.1 million sq ft in Q2. Requirements have been bolstered by West End occupiers, drawn to the City by the promise of greater options for large floor plates and also by cost savings. Requirement levels are now 22% above the long-term average of 4.1 million sq ft. 

The level of active searches over 50,000 sq ft increased further from 24 to 27 during Q2. However, there are just 17 buildings available over 50,000 sq ft, 12 of which are located in the Core and only half of these are of new and refurbished stock.

REFURBISHED STOCK DOWN, WHILE SUPPLY TIGHTENS 

The supply of new and refurbished stock totalled 1.7 million sq ft at the end of Q2, nearly half the long-term average. There are just three buildings that could offer an occupier over 100,000 sq ft. All located in the City Core, these include: 70 St Mary Axe, EC3; The Scalpel Tower, 52-54 Lime Street, EC3 and 3 Minster Court, EC3. We are currently tracking 10 active requirements for space in excess of 100,000 sq ft by occupiers exclusively targeting the City. 

Looking ahead at the supply pipeline, total under construction levels in the City are currently 6.7 million sq ft, of which 36% is already committed, leaving just 4.3 million sq ft of speculative space under construction. There is 5.4 million sq ft under construction and due to complete in the next 12 months, of which 42% is committed. This leaves just 3.1 million sq ft of speculative space coming through, which equates to approximately 12 months of supply, assuming average levels of new and refurbished take-up. 

INVESTMENT FALLS, BUT POSITIVE SIGNS EMERGE 

City investment totalled a little over £800 million in Q2 2019, down 18% quarter-on-quarter, and 76% below the long-term average. There were just two transactions over £100 million. While overall activity may have slowed, we have noted a number of interesting trends this quarter.

 Chief of these has been a return of UK funds, tempted perhaps by a slowdown in overseas appetite and therefore competition. Furthermore, a recent increase in global geopolitical tensions appears to be positioning London as a safe haven once more, based on the rising international inquiries we have received since the start of July, including the return of private equity and funds from the US and Hong Kong. 

Finally, we have also recorded an upturn in funds chasing value add properties, driven by the lack of quality stock in the market in general and the buoyancy in the occupier market. This has been evidenced by the high volume of above asking price bids our capital markets team have received on a number of assets in recent weeks.