A strong November bolsters year-to-date take-up figures
Following a quieter start to the fourth quarter, November experienced a much stronger take-up, as anticipated, totalling 775,514 sq ft across 24 transactions. This is 45% above the ten-year monthly average and brings the year-to-date take-up figure to 5.3m sq ft across 351 transactions. However, despite last month’s strong performance, take-up is currently down 5% on the ten-year average. It should be noted that December is historically a strong month, with both tenants and landlords hoping to get transactions ‘across the line’ before the year ends.
The demand for prime offices has continued throughout 2022, with the current economic headwinds exacerbating this trend. In October, an incredible 99% of take-up was of Grade A quality, whilst 92% of year-to-date take-up has been of such quality, against a ten-year average of 85%.
Sustainability and amenity offering remain high on occupiers' wish lists, as 92% of take-up in November has been BREEAM rated ‘Excellent’ or higher. So far this year, 62% of all transactions were rated ‘Excellent’ or ‘Outstanding’.
Average prime rents have continued to increase throughout 2022 as the dwindling supply of prime office space meets increasing demand
Will Wilson, City of London Office Analyst, Commercial Research
A number of key deals transacted in November: Clifford Chance acquired the entirety of 2 Aldermanbury Square, EC2 (327,000 sq ft), in not only the most anticipated deal of the year but also the largest deal since the start of 2020. The law firm has acquired the lower ground to twelfth on separate 20-year leases, with break options in the 15th year, and is thought to be paying a blended rent of £77.00 psf, with 38 months rent-free. The completion of the scheme is expected to tie in with the expiry of Clifford Chance's current lease at 10 Upper Bank Street in 2028.
Reed Smith pre-let nine upper floors at British Land’s Norton Folgate development. The law firm will acquire the Blossom Yards building (126,800 sq ft) on a 15-year term at a blended rent of £80.00 psf, with 38 months rent-free.
Finally, Partners Group acquired the sixth and seventh floors at the JJ Mack Building, 33 Charterhouse Square, EC1 (37,050 sq ft), on a 20-year term with a break option in the 15th year. The deal achieved a top rent for 2022, with the Swiss-based private equity group paying £107.00 psf on the terraced seventh floor.
This is the first time (in the City) that a rent over £100.00 psf that is not an upper floor in a tower has been achieved. Average prime rents have continued to increase throughout 2022 as the dwindling supply of prime office space meets increasing demand. Ninety-six transactions have achieved rents over £70.00 psf (33%) – this is the highest on record, both in terms of number and percentage. More impressively, 9% have seen rents of over £80.00 psf transact.
At the end of November, there is currently 13.2m sq ft of available supply, equating to a vacancy rate of 9.5% – this is a 10 bps decrease on last month but up on the long-term average of 6.3%. As mentioned above, the City is experiencing an inherent undersupply of prime office stock, with just 43% of supply being recently developed or comprehensively refurbished. Whilst the overall vacancy rate is still relatively high, compared to the long-term average, the vacancy rate in prime office stock is far lower.
Taking a look at the future supply of prime office stock, the development pipeline is scheduled to see 17m sq ft complete between 2023 and 2026. The strong pre-letting performance of the past two years means 23% of the 4.1m sq ft due to complete in 2023 has been committed to. Just under a fifth of the 3.8m sq ft scheduled for completion in 2024 has been pre-let.
Looking further ahead, 9.1m sq ft of space is scheduled to complete in 2025 and 2026, with 11% pre-let. However, with economic headwinds, including supply chain issues and cost inflation, it is to be expected that a number of these schemes will experience delayed starts and pushbacks, as their viability is questioned.
Analysis close up
In focus: City and Central London Demand
Occupiers with an active requirement considering options in the City and Central London increased 9%, rising to 8.2m sq ft. This is up 18% on the long-term average. The increase was aided by the return of the mid-to-large requirement size bracket – in the last two months, eleven active requirements over 50,000 sq ft have been brought to the market. Moreover, 66% of the total active requirements are looking for space over 50,000 sq ft, a good metric to judge where market sentiment is at.
The same sectors continue to prove their resilience, with the Professional Services and Insurance & Financial Services sectors accounting for 64% of total active requirements, followed by the Tech & Media sector (13%).
Despite the economic downturn, on the whole, we are yet to see any strong indication that occupiers are seeking to take less space. The largest proportion, reflecting 45% of occupiers with an active requirement, are currently seeking to acquire a greater amount of space when they relocate, in contrast to only 26% seeking to reduce it.