Market in Minutes: West End Office Market Watch

Q1 sees prime rents rise despite subdued leasing activity

March was the strongest month for take-up so far this year, albeit this quarter has been quiet in comparison to previous years. Leasing activity last month reached 264,341 sq ft across 25 transactions – this took Q1’s total to 652,105 sq ft across 79 transactions. This was both 35% and 20% below the ten-year long-term average by volume and number of leasing transactions, respectively.

The paucity of transactions that completed in the quarter is not reflective of a lack of appetite, however, and this is illustrated by the unusually large quantum of stock currently under offer. At the end of last month, from the stock currently available, there was 1.30m sq ft of space under offer. This is 86% above the long-term average, with the largest space under offer being the 315,500 sq ft of remaining space at the Paddington Square development, which is principally under offer to Capital Group which is taking approximately 200,000 sq ft of space.

From this 1.30m sq ft of space, 82% is classified as Grade A, whilst 78% of Q1 take-up was also made up of Grade A space. As expected, the demand for better quality office space still remains ubiquitous amongst occupiers across Central London, which has resulted in an increase in prime office rents so far this year. At the end of the first quarter, the average prime rent stood at £121.66 per sq ft, a 1.5% rise from where it stood at the end of last year.

Average Grade A rents still remain strong at £82.78 per sq ft whilst the average Grade B rent has fallen by 13% from the end of last year to reach £48.05 per sq ft as demand for this type of office space continues to lessen, albeit this is based on a smaller amount of transactions.

Q1 saw the highest rent achieved since December 2020, with VG LNG Marketing leasing the first floor (3,462 sq ft) at 80 Grosvenor Street, W1, at a rent of £180 per sq ft and a lease length of ten years. This rent is indicative of the appetite for prime office space, particularly in Mayfair and St James’s, which will continue to put upward pressure on the best quality stock.

Looking ahead, there is set to be 3m sq ft of extensive refurbishments and developments to complete this year, and a further 3.6m sq ft in 2023, which will be a record year for the West End. From this, 6.6m sq ft 26% has already been pre-let, and there is also a strong amount of space under offer. However, with building costs expected to rise by a further 3.8% this year, and with 51% of the schemes between 2022 and 2026 yet to start, construction delays will be likely as developers will be forced to review the viability of their schemes.

Last month supply rose slightly to reach 7.6m sq ft; however, in part, this rise is due to the addition of speculative Q3 2022 completions, which were added to supply at the end of this quarter, adding 606,624 sq ft to supply. Consequently, the vacancy rate has risen in March to reach 6.5%, 20 bps higher than the previous month and above the ten-year long-term average of 4.1%. However, we are still seeing the available tenant supply decline as it reached 1.6m at the end of last month, an 18% fall from the start of the year.

As well as seeing demand for prime office space we are also seeing continued favouritism for offices that have been accredited with a BREEAM rating or a top EPC rating. In Q1, 37% of take-up was made up of offices with BREEAM ratings of ‘Very Good’ or above, while those that had an EPC rating of ‘C’ or higher made up 42% of leasing activity. This suggests that sustainability credentials still remain at the forefront of occupiers' minds, a theme we anticipate will continue throughout the remainder of the year.

Analysis close up

In Focus – Active demand

The resilience of the volume of active requirements across the West End and Central London over the past two years has been a point of interest. Despite initial expectations at the start of the pandemic active requirements did not diminish, and at the end of last month, they reached 4.9m sq ft – this is 13% higher than where they stood at the end of Q1 2021.

As well as the total volume increasing, the number of occupiers that are increasing their floorplate size by 10,000 and above account for 34% of active requirements across Central London and the West End, highlighting the appetite for office space has not wavered.

In line with expectation, the Tech & Media account for the largest volume of active requirements, with 26%. This is closely followed by the Insurance & Financial sector which accounts for 25%.