Market in Minutes: City Office Market Watch

Year-to-date take-up surpasses 3.0m sq ft, whilst under offers continue to soar

October take-up brings year-to-date figures above last year’s annual total. Last month, levels of leasing activity picked up slightly as transactions totalled 373,936 sq ft, across 25 transactions. This brings the year-to-date take-up to 3.11m sq ft, up 25% on the same point last year but down 37% on the ten-year average. The underlying preference for Grade A space continues to dominate, as 91% of year-to-date take-up has been of such quality. Moreover, pre-lets have accounted for 30% of take-up so far this year, offering a snapshot into the sustained demand for new office space. This is the highest on record, with the ten-year average at 21%.

The largest transaction to occur in October saw Apple exercise their option over the 33rd, 34th and 35th floors at 22 Bishopsgate, EC2 (78,406 sq ft), having acquired the 31st and 32nd in November 2019. Another notable transaction was the Decherts acquisition of the top three floors of 25 Cannon Street, EC4 (58,588 sq ft), on an assignment from Brewin Dolphin, who had originally pre-let the entire property in May 2019.

Another transaction to note saw Optiver acquire the ground and first floor at 20 Old Bailey, EC4 (30,473 sq ft) on an assignment from Metro Bank at £59 psf. Both these transactions contributed to an increase in occupier disposal activity in October. Moreover, last month saw the highest proportion of tenant release space take-up (44%) since March 2019.

Positively, City supply fell to 12.72m sq ft during October, equating to a vacancy rate of 9.1%, down 20 bps on last month, but is still up 310bps on the long term average of 6.0%. 86% of supply is of Grade A standard, which is slightly above the five-year average.

With momentum in the market picking up, demonstrated by the increased amount of space are being put under offer, this certainly bodes well for the levels of leasing activity going into next year. Last month 609,732 sq ft of space went under offer, bringing the total to 2.7m sq ft across the City of London, up 107% on the long-term average.

A significant proportion of the space that has gone under offer has been on buildings under construction or recently completed. Last month, William Blair went under offer on floors 47-49 at 22 Bishopsgate, EC2 (81,655 sq ft). Additionally, law firms Holman Fenwick Willan went under offer on the sixth, seventh and eighth floor at 8 Bishopsgate, EC2 and Lewis Silkin for circa 30,000 sq ft at The Arbor, Bankside Yards, SE1.

Such headline news percolates through the market, providing a source of confidence for smaller requirements. This is shown in the size of unit being put under offer last month averaged at just over 10,000 sq ft, compared to August and September, which averaged 12,000 sq ft and 16,000 sq ft, respectively.

Central London requirements (excluding West End specific requirements) currently stands at 10.2m sq ft; this excludes West End specific requirements. 8.2m sq ft active demand and 2.0m sq ft potential demand. This is a 32% increase in active requirements compared to the start of this year. Once again, the Insurance & Financial Services sector and the Professional Services sector are proving to be most resilient and active within the market as they account for 22% and 21% of active requirements, respectively.

Currently, there is 15.5m sq ft of new developments and extensive refurbishments which are scheduled to complete over the next four years. As it stands 2.5m sq ft (16%) of this space has already been pre-let. A combination of environmental protocols and climate concerns continue to drive demand for sustainable office space. Between now and the end of 2025, 68% of developments are rated BREEAM ‘Very Good’ or higher.

Analysis close up

In focus: Rents

This month’s ‘In Focus’ takes a closer look at the rents achieved in 2021. So far this year, we have seen strong rental performance for prime office space. The continued bias for quality units has insulated 2021 headline and prime rents. The City of London has experienced an increased proportion of higher rents, with nearly a quarter of rents achieved this year being in excess of £70.00/sq ft (23%), this is compared to the five-year average of 14%. The year-to-date average prime rent has settled at £81.33/sq ft, a 1% increase on 2019 (pre-Covid-19).

Taking a more granular view at Grade A average rents, the strongest performing sub-market, this year, has been Southbank with average Grade A rents increasing 7% on last year. Aided by a handful of pre-lets and the anticipation of a large development pipeline, we forecast rents in the Southbank sub-market to increase 2.8% over the next five years. The City Core is the second-best performing, with average Grade A rents increasing marginally from £65.31/sq ft to £65.50/sq ft. The N&E Fringe and Midtown have decreased 1% and 5%, respectively.