First half of 2022 sees over 3m sq ft of transactions completed across the City
June saw take-up reach just shy of half a million sq ft (486,785 sq ft) across 36 transactions. As we reached the end of the first half of 2022, total take-up amounted to 3.1m sq ft across 197 deals. Positively, this is up 8% on the ten-year average, but down in terms of the average number of deals, highlighting an increasing average transaction size, which can partially be attributed to the higher level of pre-letting activity across the City.
In the largest transaction to occur last month, Linklaters exercised their option to acquire the 15th to 17th floors at 20 Ropemaker, EC2 (51,300 sq ft). This comes after the law firm originally pre-let over 300,000 sq ft in the building in February 2020, on a 20-year term, at £72.50/sq ft with 48 months rent-free.
Knotel swooped in on a duo of transactions, acquiring the entirety of the Lackington Suite at Brookfield’s new development, The Gilbert, Finsbury Square, EC2 (32,443 sq ft.). Additionally, the Serviced Office provider acquired the 8th to 11th floors at the newly completed HYLO, 103,105 Bunhill Row, EC1 (26,673 sq ft), on a 10-year term at £72.00/sq ft. This comes after a number of transactions from Serviced Office Providers, taking their total contribution in take-up to 8% for 2022 – this is compared to 4% in both 2020 and 2021.
A notable theme throughout 2021 and 2022 has been the level of pre-letting, accounting for 31% of take-up since the start of last year. Driven by rising scrutiny with regard to achieving sustainability goals, and battling for the best talent, there continues to be a preference for premium office space. The Professional Services sector has accounted for 53% of pre-lets in this timeframe and 29% of total take-up. The Insurance & Financial Services sector has also remained resilient, accounting for 18% of total take-up – this is followed by the Business & Consumer Services sector, 15%.
The City market has experienced a strong first half to 2022, both in terms of take-up and space going under offer. In June, 191,808 sq ft of space was placed under offer, and for the last four months, the cumulative total has consistently sat around 1.9m sq ft, which is 36% above the long-term average (1.4m sq ft). It should, however, be mentioned that in the current climate, office space is staying under offer for longer than usual, with the legal due diligence seemingly being protracted.
Despite the addition of Q4 completions, supply across the City remained constant at 12.7m sq ft, equating to a vacancy rate of 9.1%. Although this is down on the post-pandemic peak by 30 bps, it is still up 280 bps on the 10-year average of 6.3%. Prime office space remains undersupplied, with 42% of availability consisting of comprehensively refurbished or newly developed. Moreover, just 37% is rated BREEAM ‘Excellent’ or ‘Outstanding’ – this should be noted when 60% of space acquired this year has been of the same credentials.
2022 has seen 1.3m sq ft complete already, with another 1.3m sq ft anticipated for completion over the remainder of the year, 21% of which has already been pre-let. Currently, there are 14.1m sq ft of new developments and extensive refurbishments that are scheduled to complete from now until 2025. 2023 has 27% already pre-let, and 2024 has 18%. Overall, 23% of the development pipeline for the next five years has been pre-let. We expect more commitments as the demand for prime office space continues.
From growing raw material costs and supply chain issues to increasing labour costs to keep up with rising inflation and higher building costs, it is likely that in the coming quarters, the certainty and viability of some of the schemes on the pipeline will come under review, and it is to be expected that some will experience both delays in starts and subsequent completion dates.
Analysis close up
In focus: Rents
Entering the second half of the year, this month’s In Focus will look at the rents achieved in the City of London. Sustained demand for best-in-class office space has resulted in rising rental growth. A top rent for the year was achieved in June, which saw Palo Alto Networks acquire the 55th floor as 22 Bishopsgate, EC2 for £105.00 psf, leaving just a couple of floors still vacant in the tower.
H1 2022 average prime rents have increased 3% on 2021 levels, settling at £83.72 psf. Average Grade A rent reached £66.85 psf – this is up 4% on 2021. Additionally, there have been a record number of deals achieving rents over £70.00 psf (23%), up on the five-year average of 19%.
Taking a more granular view, Southbank achieved the highest H1 average Grade A rent at £71.05 psf, up 10%. The City Core, grew by 3% and averaged £67.00 psf, followed by the Northern & Eastern Fringe grew 4%, settling at £65.84 psf. City Midtown average Grade A rents fell by 1% to £64.17 psf, down from £65.13 psf.