Tenant-controlled space reaches a three-year low as supply continues to reduce
Following on from the record level of activity we saw last month, July take-up reached 237,000 sq ft across 29 transactions. This brings year-to-date take-up to 2.3m sq ft, which is up 5% on the long-term average for the same period. The continued strong appetite from occupiers for locations in the core sub-markets is reflected by the fact that half of July’s transactions completed in Soho, Mayfair St James’s and North of Oxford Street.
The largest transaction to complete in July was SaltPay’s acquisition of 25,000 sq ft on the 15th to 18th floors at Windsor House, Victoria Street, SW1. Another notable transaction to complete was Winton Capital’s acquisition of the 4th and 5th floors, (24,574 sq ft) at Hooper’s Court, Basil Street, SW3, on a ten-year term at £107 per sq ft.
Encouragingly we continued to see the quantity of tenant-controlled space on the market continue to decrease, with a 7% reduction seen over the month. At 1.26m sq ft, tenant-controlled space is now also down 15% on the end of 2019, where it stood at 1.4m sq ft and the lowest level of tenant-controlled space we have seen in almost three years. Sub 5,000 sq ft Grade B floor plates make up 45% of the tenant-controlled space currently on the market, and over half of all available tenant space is available on a term of five years or less.
With this, we also saw an overall reduction to West End supply, with the vacancy rate moving down by 30 bps over the month to stand at 5.6% at the end of July. Mayfair saw the largest monthly sub-market reduction to supply, with the vacancy rate moving down 60 bps on the previous month to 3.8%. This was followed by NOX East moving down 40 bps to 3.9% at the end of July.
Despite the headwinds, there is yet to be any sign of occupiers changing their preferences or office space requirements, with space under offer slightly up on the previous month at 1.2m sq ft. There has been a noticeable increase in the length of time it is taking for transactions to complete.
Covent Garden accounts for the largest proportion of space under offer with 17%, followed by North of Oxford Street West with 16%, and then North of Oxford Street East and Victoria, both accounting for 12% of space under offer.
The sustained demand for better quality space is reflected by the fact that offices of Grade A quality account for 74% of space under offer at present. In terms of floor plate size, 44% of Grade A space that is under offer is on floor plates sized 5,000 sq ft or less, illustrating the continued sustained appetite for better quality space from occupiers of all sizes.
Active and potential Central London requirements (excluding any city-specific requirements) stood at 5.9m sq ft at the end of July, with active requirements increasing by 36% over the month, with more occupiers activating their searches since the end of H1.
Financial sector companies account for over half of the quantum of occupiers with a West-End-only-specific requirement. This year we have continued to see the particularly strong levels of demand we saw from Asset Management, Investment Management and Private Equity firms during 2021. So far this year, already the sub-sector has accounted for 589,500 sq ft of take-up, already very close to overtaking the high level (600,000 sq ft) of take-up we saw from this sub-sector in 2021.
Analysis close up
In Focus – Development pipeline
The buoyancy of the occupational market, coupled with the growing focus on improving energy efficiency, particularly with MEES coming into view over the next few years, has resulted in a robust development pipeline despite the continued upward pressure on costs and project timescales.
We anticipate 12.6m sq ft of development completion between now and 2026. Currently, around 8% of the 2023–2026 pipeline has been pre-let, with a further 5% believed to be under offer at present.
A record 3m sq ft is expected to be delivered by the end of this year, although, at present, only 5% of this has completed. With half of this year’s scheduled completions expected in Q4, there is an increased likelihood we could see some of these schemes being pushed out into early 2023 with the typical construction delays at play.