Underlying demand continues to remain strong, though a short-term drop is expected
It is difficult to currently forecast the impact on the West End office market COVID-19 will have. The difficulty in leasing space in the current climate will certainly have an impact on take-up going forward. However, the inevitable delays to the development pipeline will result in further constraints on supply, especially for larger occupiers, who already have limited options available to them. Therefore, we are likely to see the continuation of large pre-lets throughout 2020, which will help compensate for the short-term decrease of small- to medium-sized lettings. Moreover, with the lack of new supply being launched to the market at the moment, it is unlikely the short-term drop in demand will result in a drastic increase of the vacancy rate in the short term.
During February West End take-up reached 212,829 sq ft across 20 transactions. This brought year-to-date take-up to 456,371 sq ft. This was down 44% on the same period over 2019 and down 28% on the long-term average for the end of February. The volume of transactions, at 38, is the lowest volume for this period in seven years. Around 75% of space that has been let so far this year is of Grade A standard.
The largest transaction to complete during the month was Google’s pre-let of 32,000 sq ft at Argent’s Q1 development on confidential terms. This scheme is due for completion later this year in Q3.
The Tech & Media sector has so far accounted for 50% of take-up (194,398 sq ft), followed by the Insurance & Financial sector with 17% and the Serviced Office Provider sector with 14%.
Despite the lower level of transactional activity we have seen so far this year, space under offer was up by 17% on the previous month, with an additional 301,219 sq ft going under offer during February. This brought the overall amount of space under offer to 1.5m sq ft, (up 115% on the long-term average). In addition to this, West End and Central London active requirements were up 2% on the previous month and stood at 5.3m sq ft. 43% of West End and Central London active requirements are sized 25,000 sq ft and over.
Albeit the sample size of data is smaller, the average Grade A rent achieved so far this year stands at £71.73 per sq ft, which is down 7% on £76.83 per sq ft achieved over the same period in 2019. The highest rent achieved over 2020 so far has been £115 per sq ft at 1 Curzon Street, with Gulf International taking the part 1st floor (21,745 sq ft) on a 15-year lease.
Supply at the end of the month stood at 5m sq ft which equates to a vacancy rate of 4.5%, up 10 bps on the previous month. Current supply equates to 13 months’ worth of take-up at the average rate we have seen over the past five years and over two-thirds of supply is of Grade A standard. Landlord-controlled space, increased by 1% over the month to 73%.
55% of the development pipeline for the next two years has already been pre-let and a further 10% is currently under offer. 28 speculative schemes over 100,000 sq ft set to deliver between 2020 and 2023.