Summer slowdown but active requirements on the rise
As to be expected with the school holidays starting, take-up for July was slightly muted, reaching 144,128 sq ft across 21 deals, equating to an average transaction size of just 6,863 sq ft. This brings total take-up for the year to 3.2m sq ft – 64% up on the same period last year, but down on the ten-year average by 5%.
The sustained demand for Grade A stock continues as 91% of year-to-date take-up has been of such quality. Sustainability remains at the forefront of occupier demand and decision-making, with 71% of year-to-date take-up being BREEAM rated ‘Very Good’ or above.
In the largest transaction to occur last month, PEI Media acquired the fifth floor at 100 Wood Street, EC2 (16,661 sq ft), this is serving as expansion space from the space they already occupy on the 7th floor. The private equity firm signed a ten-year lease with a fifth-year break option at £55.00 psf, with 25 months’ rent-free. Another notable July transaction saw 10x Banking acquire part of the fifth floor at Holborn Place, 33 Holborn, EC1 (16,200 sq ft), on a five-year lease at £56.00 psf, with nine months’ rent-free.
Although a muted month in terms of transactions, 43% achieved rents over £70.00 psf. The top rent for July saw M&F Healthcare Communications pay £88.50 psf at the newly completed The Bindery, 53 Hatton Garden, EC1 (3,316 sq ft) on a five-year lease.
The Professional Services sector remains dominant, accounting for 28% of this year's take-up. The sector has proven its resilience throughout the pandemic, accounting for over a quarter of take-up since the start of 2020. As always, the Insurance & Financial Services sector has been close behind, accounting for 19% in the same period. Spurred on by timely lease events, and environmental and social pressures, both sectors have actively pursued brand new prime office stock. Conclusively, the two sectors have accounted for 71% of all pre-lets since the start of 2020.
In July, 226,220 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). 42% of current under offers are in the development pipeline. This will invariably increase as prime stock remains undersupplied. It should, however, be mentioned that in the current climate, office space is staying under offer for longer than usual. This is due to the increasingly protracted legal due diligence process, as well as a number of complicated soon-to-be pre-lettings in the pipeline.
Despite a subdued number of transactions completed in July, active requirements for the City and Central London are up 10% on the previous month, reaching 8.5m sq ft. The higher level of corporate occupiers with upcoming lease events partnered with the intensified war for talent will likely continue to drive occupiers to use this as an opportunity to upgrade their existing space. Our research suggests that between 2023 and 2026, there are over 21m sq ft of lease events across the City of London.
With the addition of 294,810 sq ft, supply rose marginally last month, settling at 12.9m sq ft. This equates to a 9.2% vacancy rate and an outward movement of 10 bps on the end of June. Although this is down on the post-pandemic peak by 20 bps, it is still up 290 bps on the ten-year average of 6.3%. The sustained appetite for better stock is leaving lower quality space ‘stuck’ on the market. On average, Grade B quality offices stay on the market for 25 months, this is compared to 14 months back in 2016.
Analysis close up
In focus: Development pipeline
This month’s ‘In Focus’ looks into the development pipeline, amidst rapidly rising costs. The current pipeline looks extremely healthy, with a total of 16.6m sq ft of space due to complete between 2023 and 2026, with a fifth already pre-let. On average, the City of London is expected to see 4.15m sq ft complete each year until 2026, this is compared to the historic annual figure of 3.15m.
Although the pipeline looks robust, the certainty and viability of schemes are being questioned in the context of the current cost inflation. Moreover, the chart below shows completions against take-up forecasts and with the sustained demand for prime stock showing no let-up, the undersupply of best-in-class looks to become even more strained.
It should be mentioned that rising construction costs will inevitably affect developments and their associated build costs. With 39% of the pipeline yet to start construction, it is to be expected that some will experience both delays in starts and subsequent completion dates.