A near record-breaking June brings H1 take-up above the long-term average
The first five months of the year saw average monthly take-up reach around 230,000 sq ft, as we were seeing deals take much longer to complete, which resulted in unusually high levels of space under offer. The same cannot be said for June, however, as we saw 1m sq ft complete, across 40 transactions, which is the third highest monthly take-up we have ever recorded.
As a result of a busy June, at the end of H1, take-up reached 2.17m sq ft across 187 transactions. This is 13% above the ten-year long-term average and 68% higher than where leasing activity stood at the end of H1 last year. The main driver of the increased activity has been pre-lets, with seven of the ten largest transactions being pre-lets sized 40,000 sq ft and above, which is a promising sign of market sentiment going forward.
The largest transaction to complete in June, and the largest of the year so far, was Capital International’s pre-let of the 8th to 16th floors (220,000 sq ft) at Paddington Square, W2. This was on a twelve-year lease with the achieved rent currently confidential.
As occupiers are facing increasing scrutiny with regards to achieving sustainability goals whilst also striving to get people back in the office, there continues to be a preference for premium office space. This is reflected by 89% of take-up year to date being of Grade A quality, and in June alone, Grade A transactions accounted for the overwhelming majority, with 98%. Furthermore, buildings with a BREEAM rating of ‘Very Good’ or above have accounted for 52% of leasing activity.
Unsurprisingly, with such a busy month for take-up, we have seen the volume of active requirements across Central London and the West End reduce by 15% from the previous month to reach 3.6m sq ft. The Insurance & Financial Services sector accounted for the largest business sector, with 28%. This was closely followed by the Tech & Media sector which accounted for 25% of the total volume of active requirements.
Along with active requirements reducing, we have also seen the level of space under offer start to drop last month as it coalesces into deals. As it stood at the end of June, we were tracking 1.1m sq ft of space under offer, and although this is lower than the total we have seen over the year so far, it is still 15% above the long-term average.
Supply has also continued to fall; in fact, last month, the vacancy rate was the lowest it has been since November 2020, standing at 5.9% – that is even in spite of 534,159 sq ft of speculated Q4 2022 completions being added into supply. The total volume of space stood at 6.9m sq ft, a 4.5% reduction from the previous month, and 66% is made up of Grade A buildings.
The buoyancy of the occupational and development markets, as a result of continued strong occupier demand for new space, has meant that 63% of this year’s development pipeline has been pre-let. This year and next year continue to be record years for new developments in the West End, and between 2022–2026, we are currently anticipating 13m sq ft to complete. The sub-market with the most amount of newly developed or refurbished stock is King’s Cross & Euston with 3.2m sq ft – this is followed by Covent Garden and Victoria both with 1.4m sq ft.
Analysis close up
In Focus – Rents
Due to the ongoing demand for prime office space, evidenced in the text above, we are yet to see any downward trends for average prime rent across the West End. At the end of the first half of the year, the average prime rent stood at £119.38 per sq ft, which is similar to where it stood at the end of last year, but is a 6.6% rise from the end of 2020. Similarly, we have witnessed average Grade A rents increase, and at the end of H1 2022, they have risen by 2.5% from the end of 2021 to stand at £84.37 per sq ft.
As occupiers seem to be ready and willing to pay higher rents for best-in-class space, the lessening demand for Grade B offices has caused rents to fall. As it stood at the end of June, Grade B rents had fallen by 6.7% from the end of 2021 to stand at £51.31 per sq ft.
Going forward, if the demand for prime office space sustains itself, it will be interesting to track the effect this will have on Grade B rents across the West End, and if we could see greater falls.