Q1 2021 City take-up the highest since first lockdown in March last year
Please note that this piece is not intended as an analysis of Covid-19 on the office market, rather a factual analysis of the market metrics.
Take-up for March reached 273,058 sq ft across 17 deals bringing the total for Q1 2021 to 771,406 sq ft (46 deals), which is down on this point last year by 43% (1.35m sq ft) and down 31% on the 10-year average take-up for the first quarter of the year. The current 12-month rolling take-up fell to 2.35m sq ft, this is compared to the end of Q1 2020 where it stood at 7.0m sq ft, a 66% decrease. Grade A space continues to be the preference within the City, as 95% of take-up in Q1 was of Grade A quality.
The largest deal to complete last month saw TikTok acquire the entire of Helical’s Kaleidoscope, 4 Lindsey Street, EC1 equating to 86,163 sq ft across the ground to fifth floor at a blended rent of £86.00 psf. This was on a 15-year term, with a break option at 10 years and with 24 months rent-free.
Additional notable deals include DTEK acquiring the 45th floor (6,203 sq ft) at The Leadenhall Building, EC3, at a reported top rent of £108.75 psf. Alliance Bernstein acquired the seventh and eighth floor at 60 London Wall (52,158 sq ft) on a 10-year term at an achieved rent of £79.00 psf and 30 months rent-free.
With the assistance of the TikTok deal, the Tech & Media sector dethroned the Professional Services sector in terms of take-up, accounting for 40% and 26% of take-up for March respectively. However, for Q1 2021 the majority of demand has come from the Professional Services sector at 44% of total take-up. This is followed by the Tech & Media sector (17%) and the Insurance & Financial Services sector (14%).
At the end of Q1 2021, there was 12.3m sq ft of available supply, equating to a vacancy rate of 8.9%, which is up on Q1 last year by 360bps and also unsurprisingly up on the long-term average of 6.6%.
At the end of March, 84% of supply was of Grade A standard, which is in line with the five-year average of 84%. The majority of supply (61%) is within the City core, and therefore, has a higher vacancy rate of 11.5%, compared with just 6.9% in the fringe.
Tenant-controlled space accounts 28% of available supply for the last two months, which is up on the five-year average of 26%. However, we have seen a slowing of tenant release space entering the market with 95,103 sq ft of new space coming on to the market in March.
At the end of Q1 this year, the current average prime rent is £82.50 psf. Therefore, this was up on Q1 last year by 10% and is the second highest quarterly prime rent on record. Meanwhile, the average Grade A rent has settled at £64.93 psf for the quarter, down on Q1 2020 (£65.30 psf). It should be noted that even though headlines rent have remained relatively unchanged, the average rent-free has moved out to 28 months, this is in comparison to 23 months at the end of Q1 2020.
Total demand for the City of London stands at 9.5m sq ft, this consists of 6.4m sq ft of active requirements and 3.1m sq ft of potential requirements. This is down 8% on total demand at the end of 2020, but this is up on the long-term average by 8%. As a comparison, Q1 2020 saw total demand requirements of 8.3 m sq ft.
A quick look ahead sees 3.2m sq ft in space due for completion in 2021, 31% of which is already pre-let, leaving 2.2m sq ft of space left to be delivered speculatively. 2022 has 2.9m sq ft in the pipeline, of which none is pre-let yet.
Analysis close up
In focus: Tenant-controlled supply
The steep rise in supply during 2021 is partially contributed to by the 529,806 sq ft of tenant supply entering the market since the start of this year. Moreover, since the start of the pandemic, 80% of new tenant-controlled space have sub 15,000 sq ft floorplates sizes.
Currently, 29% of supply on the market is tenant release space, totalling 3.5m sq ft – this is in comparison to 1.8m sq ft this time last year, an increase of 94%. As shown in the chart below, the Insurance & Financial Services sector accounts for a quarter of the tenant-controlled supply entering the market since Covid-19. This is followed by the Banking sector, Business & Consumer Services sector and the Tech & Media sector, who account for 20%, 12% and 12%, respectively. Therefore, these four sectors contribute to 69% of the total tenant release space within the City of London market.