Market in Minutes: City Office Market Watch

Positive market sentiment returning as active requirements reach record level

February take-up reached 546,166 sq ft across 18 deals, larger than both January and February 2021 take-up combined. The total year-to-date figure for 2022 currently sits at 834,221 sq ft across 48 deals. Positively, this is up 14% on the ten-year average for this point in the year.

The attraction to prime office space continues to be a key driver for occupiers, with 94% of take-up this year being of Grade A quality, of which 69% was recently comprehensively refurbished/developed. Moreover, just under two thirds of take-up so far this year has been in buildings BREEAM rated ‘Excellent’ or ‘Outstanding’, this is compared to 59% at the same point last year or the five-year average of 57%.

The largest deal to complete last month saw the anticipated pre-letting of Atlantic House, 21 Holborn Viaduct, EC1 (266,000 sq ft) to US law firm Hogan Lovells, terms remain confidential. Work on the new premises will commence in summer 2022, ahead of occupancy in Q4 2026.

Another notable transaction saw Aviva acquire the first to fourth floor at 80 Fenchurch Street, EC3 (78,276 sq ft) on a ten-year term at £67.50/sq ft with 27 months rent-free.

Continuing its dominance from last year, the Professional Services sector has accounted for 37% of year-to-date take-up, albeit significantly contributed by the above Hogan Lovells deal. Once again, following close behind, the Insurance & Financial Services sector, accounting for 24% of take-up so far this year.

Total City supply rose last month by 0.1% and currently stands at 12.4m sq ft, equating to a vacancy rate of 9.0%, This is still up 3% on the same point last year and up on the five-year average of 8.3m sq ft.

The availability of prime office space remains slightly undersupplied, with 41% of current supply consisting of space that has been newly developed or comprehensively refurbished in the past ten years.

The majority of supply (60%) is within the City Core and which consequently has a higher vacancy rate of 11.1% compared to 6.8% in the City Fringe. It should be noted that 27% of available stock is tenant-release space, coming in just 280,751 sq ft from the peak in August 2021 and still above the long-term average of 25%.

In February, 199,873 sq ft of space went under offer, bringing the total across the City to 1.7m sq ft – this is 22% above the long-term average. Moreover, we expect to see sustained take-up for best in class office space – currently, 68% of space under offer is either recently redeveloped or refurbished or still in the development pipeline.

Active requirements that will consider Central London and the City have increased 16% from the end of 2021, reaching the highest level on record (8.6m sq ft), reflecting greater level of optimism in the market. Of the 8.6m sq ft of known active requirements, the Tech & Media sector accounts for 28%, this is followed by the Insurance & Financial sector and Professional Services sector accounting for 24% and 21%, respectively.

We have continued to see an increase in average rents so far this year. The average Grade A City rent for the year to date is £68.60/sq ft, up on Q4 last year by 7%. In fact, in the last six months alone we have seen 47 rents achieved. over £70.00/sq ft, or 30% of all known rents in that time period. To put that into context, that is more than in any full calendar year apart from 2019.

Analysis close up

In focus: Development pipeline

Fuelled by environmental and social motivations, 2021 witnessed record pre-lettings as a percentage of annual take-up, at 36%. Looking at the development pipeline, there is 4.3m sq ft scheduled for completion over the course of 2022, of which 34% is already pre-let. The pipeline will see 4.4m sq ft of office space enter the market in 2023 and 4.6m sq ft in 2024, of which 17% and 14% are pre-let, respectively. Between 2022 and 2025 there is 15.7m sq ft of office space scheduled for completion, with a fifth already committed.

Taking a more granular view, the City Core is anticipating 6.7m sq ft of office space to complete between now and 2025, this is followed by the South Bank where 3.5m sq ft is scheduled for completion, and then followed by the City Fringe (3.0m sq ft).

As to be expected with comprehensive refurbishments and developments, the top ESG credentials are targeted. 65% of the development pipeline are looking to achieve a BREEAM rating of ‘Excellent’ or ‘Outstanding’.