Take-up recorded in the first three quarters of 2021 above the five- and ten-year average

The recovery in demand in the Greater London & South East office market has continued after the lockdowns experienced in 2020. Take-up recorded in the first three quarters of the 2021 reached 2.6 million sq ft which is 8% above the annual total of 2.4 million sq ft transacted in 2020 and represents a 13% increase on the first three quarters of 2019. Furthermore, the take-up recorded in Q1–Q3 2021 was 10% and 6% above the five- and the ten-year average for the same period.

Corporate occupiers have been notably active in the first three quarters of 2021. with seven deals recorded over 50,000 sq ft. This is the highest total after the first three quarters since 2016. The largest deal recorded in Q3 2021 was Canon acquiring 151,000 sq ft at The Bower, Stockley Park. Canon will occupy the building as their UK and European headquarters. Another notable transaction in Q3 2021 was InterSystems leasing the entirety of One Victoria Street, Windsor which comprises 48,114 sq ft. The building was speculatively developed by Legal and General and is now fully let prior to practical completion.

The flight to quality in the market has been accelerated by the Covid-19 pandemic, with 69% of take-up recorded being of Grade A quality in 2021, which is the highest proportion in the last three years. This trend is further evident when focussing solely on the Western Corridor with 80% of take-up being for Grade A space which is the second-highest proportion in the last decade. The importance of ESG credentials are rising to occupiers, which is reflected in the take-up of buildings which can satisfy these criteria. Buildings that have an EPC rating of A or B have accounted for 56% of take-up recorded in 2021 which is outpacing the supply with only 35% of space available being in buildings that are EPC rated A or B.

The public sector has been the most active business sector in 2021 accounting for 23% of take-up, which has been driven by the expansion of the Department for Work and Pensions office footprint. The manufacturing and industry sector which contains life science occupiers and technology sector have been the next two most active occupier types.

It is expected that the positive momentum in the market will continue, which is evident in the uptick in requirements. There were 5.79 million sq ft of requirements recorded in the first three quarters in 2021 which is a 4% increase when compared to the annual total recorded in 2020.

Supply levels below average and the development pipeline constrained

Supply in the market has marginally increased by 6% from the end of 2020 to stand at 14 million sq ft. The increase can be predominantly attributed to a rise in Grade B space being returned to the market. There has been an 11% increase in available Grade B space since the end of 2020. Supply levels have been on a general downward trend over the last decade and are currently 15% below the long-term average.

The current occupier demand in the market is focused on leasing Grade A space and this currently accounts for 47% of available supply demonstrating the imbalance in the demand and supply with 69% of space transacted this year being of Grade A standard. The development pipeline is limited across the region with 1.4 million sq ft under construction which equates to five months take-up in an average year.

Flight to quality from occupiers continues to drive rental growth

Despite the weaker economic environment created by the Covid-19 pandemic, rental growth has continued in the market. Average Grade A rents have increased by 3% from the end of 2020, the ongoing flight to quality from occupiers has been accelerated by the Covid-19 pandemic and occupiers are prepared to pay premium rents to secure the best quality space.

New developments and comprehensive refurbishments have been able to achieve record-high headline rents in 2021. This was exemplified in St Albans and Windsor with Ten Bricket Road and One Victoria Street both achieving record-high rents for both submarkets in Q3 2021.