Market in Minutes: City Office Market Watch

City of London achieves the highest average quarterly prime rent

Take-up for December reached 417,937 sq ft across 28 deals, bringing Q4 take-up to 1.4m sq ft. Historically, the final quarter of the year is the most active, as landlords and tenants look to transact before the Christmas break. This was not the case in 2022, with take-up being 22% down on the Q4 long-term average.

Annual take-up for the year reached 5.8m sq ft, which is up on 2021 by 21%, but down on the ten-year annual average by 8%. The additional 77 deals completed in Q4 brings the total for the year to 387, which was up on 2021 by 98 deals, but still down on the 10-year average of 407 deals.

Grade A space remained the clear preference as it accounted for 92% of take-up, which is up on the ten-year average of 83%. Sustainability credentials and the amenity offering remained high on occupiers’ wish lists, with 62% of all transactions being rated ‘Excellent’ or ‘Outstanding’. This trend will continue to drive decision-making throughout 2023, with a dwindling supply of prime and increasing environmental pressures creating a rush to acquire the best space.

The largest deal to transact in December, saw Knotel acquire the 4th, 5th and 6th floors at The Hallmark Building, 52 Leadenhall Street, EC3 (51,202 sq ft). This was reportedly on a managed agreement.

Another notable letting saw a confidential party acquire part of the first and entire second floor at Riverbank House, 2 Swan Lane, EC3 (48,230 sq ft). This is the first deal to transact since the comprehensive refurbishment of the reception.

On behalf of consumer healthcare provider Haleon, Instant Managed Offices acquired the 8th and 9th floors of Triptych, SE1, in May 2022. Similarly, last month, Haleon, with Instant Offices, acquired the 3rd, 4th and 5th floors, under another managed arrangement. As a result, Triptych is now fully let across six transactions, all occurring in 2022 and within eight months of practical completion.

Taking a look at the future supply of prime office stock, the development pipeline is scheduled to see 16.3m sq ft complete between 2023 and 2026

Will Wilson, City of London Office Analyst, Commercial Research

Throughout 2022, the Professional Services sector has consistently dominated take-up figures, accounting for 29% of total take-up. The Insurance & Financial Services sector contributed to 18%. Since Covid-19, both sectors have shown strong resilience through the tumultuous economic environment and have accounted for 47% of total take-up in that time frame.

Total City supply has increased marginally, settling at 13.4m sq ft. Since August, the vacancy rate has remained between 9.5% and 9.6%. Despite the high vacancy rate compared to the long-term average (6.3%), the bifurcation within the market means vacancy rate amongst prime stock is far lower.

Moreover, the market is experiencing increasing ‘stickiness’ amongst the lesser-quality space. The churn rate of Grade B units has halved since 2019. The average void period length has increased from 13 months to 26 months, further demonstrating the disconnect between demand in supply, with void periods extending on Grade B space but headline rents rising on prime units.

Taking a look at the future supply of prime office stock, the development pipeline is scheduled to see 16.3m sq ft complete between 2023 and 2026. High levels of pre-letting over the last two years has resulted in 36% of the 4.9m sq ft due to complete in 2023 having been et prior to completion. A fifth of the 4.2m sq ft scheduled for completion in 2024 has been pre-let. Between 2023 and 2026, 22% of the development pipeline has been pre-let. We anticipate the combination of inflationary pressures and high interest rates will lead to delayed development start dates and, therefore, delivery.

Analysis close up

In focus: City Rents

Q4 average prime rent reached £88.36/sq ft – this is a record-setter for the City of London. Annual average prime rents increased 4.5%, settling at £86.03 psf. Similarly, average Grade A rents increased 4.2% to reach £67.13 psf. The bifurcation between the ‘best’ and the ‘rest’ is becoming increasingly pronounced. Between now and 2026, we forecast prime rents to increase 3.4% year on year, compared to -0.7% for Grade B space.

In 2022, Southbank was the best-performing submarket, averaging £71.55 psf – this was partially due to a reduced number of transactions and the flurry of activity around Triptych, SE1, and Arbor, Bankside Yards, SE1. For the second time ever, the N&E Fringe average Grade A rent settled higher than the City Core, a difference of £0.84 psf (£67.52 psf).

Looking forward, the City Core and Southbank are forecasted to see the highest rental growth, averaging 3.4% over the next five years. The N&E Fringe is predicted to experience the least rental growth at just 2.3% year on year.