Under-offers 46% above average as take-up remains robust
Similar to what we saw this time last year, leasing activity in October was somewhat muted compared to previous months, with take-up reaching 276,866 sq ft across 25 transactions. This brought YTD take-up to 3,759,676 sq ft across 350 transactions, up 12% on the same point last year, and above the ten-year average by 13%.
The largest transaction to complete last month was Lazard’s pre-let of the entirety of Invesco’s 20 Manchester Square, W1 development (81,281 sq ft), on a 15-year lease for a confidential rent. The refurbishment is due to complete in Q2 2023.
This transaction largely resulted in North of Oxford Street West, accounting for over a third (37%) of overall take-up, followed by North of Oxford Street East (17%) and Victoria (16%).
The Financial Services sector continues to drive leasing this year, with 37% of YTD take-up. Notably, we have already witnessed record-high take-up for this sector this year at 1.4m sq ft, up 207% compared to the YTD ten-year average. This stands in contrast to the Tech & Media sector which has accounted for just 19% of take-up we have seen so far this year, down on the long-term average of 29%, and reflects the significant fall in demand with the challenges facing this industry.
Grade A rents remain stable as demand for high-quality space has supported average rents thus far, particularly in the core. The average Grade A rent achieved so far this year stands at £85.67 per sq ft, a rise of 5% from October 2021.
Although total demand increased overall this month to 5.6m sq ft, it was solely driven by an increase in potential demand. In fact, active demand fell for the third consecutive month to hit its lowest level since January 2019, and overall demand is 10% down on the long-term average. This is representative of the weakened demand we have seen from the Tech & Media sector. Despite this, Tech & Media still represents the largest sector in terms of active demand at 32%, followed by the Insurance & Financial Services sector at 20% and the Professional Services sector at 13%.
Total supply increased for the third consecutive month to 7.4m sq ft, in turn, leading to a 20 bps rise in the vacancy rate to 6.3%. However, supply still remains lower than last year when it stood at 7.8m sq ft, equating to a vacancy rate of 6.7%. The vacancy rate is likely to rise further due to a combination of a significant amount of developments scheduled for delivery next year, and demand cooling off from the Tech & Media sector.
Breaking down supply further reveals that while landlord-controlled space has risen to 6.1m sq ft, tenant-controlled space declined this month to 1.3m sq ft. Although this is the second-lowest monthly figure since April 2020, the reduction in tenant-controlled space is expected to be temporary.
Total under-offers reached 1.4m sq ft, 46% higher than the ten-year average. This suggests the market remains in a strong position going into the new year despite the challenges in the wider economy.
This resilience is reinforced by pre-let figures for future development projects showing that 29% of the total space due for completion next year has already been pre-let. Taking a longer-term view, 15% of the 2023-2026 pipeline has been pre-let.
Analysis close up
In Focus – Development pipeline
Despite rising costs for developers, the development pipeline for the West End remains robust. Between 2023 and 2026, 12.1m sq ft is set to complete, with an average of 3.0m sq ft to be delivered each year until 2026. This represents a 39% increase on the long-term average, as developers seek to try and fill a shortage of high-quality space that remains in demand amongst occupiers.
Development activity over the next three years is largely concentrated in the North (North of Oxford Street East and West, King’s Cross and Paddington) and the Core (Mayfair, St James’s, Soho and Covent Garden), which account for 45% and 31% total space respectively. 28% of space in West End North has been pre-let compared to 23% in West End Core.
Recent spikes in costs and economic uncertainty have forced the delay of many schemes. The chart below outlines the timeline changes between the Q3 2021 and Q3 2022 pipelines and reveals that 31% have been delayed by fewer than 12 months, compared to 12% which have been set back by more than a year.