City is slow to wake from festive slumber; however, under offers continue to provide a positive outlook
The year started at a slower pace when compared to 2022, with January take-up reaching 322,647 sq ft across 14 deals. This is 9% down on the ten-year average and the lowest monthly number of transactions since January 2021 (14).
Grade A space remained the clear preference as it accounted for 96% of take-up, which is up on the ten-year average of 84%. The ongoing economic uncertainty and associated headwinds have continued to exacerbate the bifurcation of the Central London office market.
January take-up was predominantly supported by TikTok’s pre-letting of Verdant, 150 Aldersgate, EC1. The creative platform acquired the entirety of the Beltane & Topland development (134,279 sq ft), which is due to complete in Q2 2024. TikTok is thought to have taken the space on a 15-year term, with a break option in the tenth year at a blended rent of £78.00/sq ft.
In the second largest transaction of the month Kantar Media acquired the first and second floor at Vivo, Southbank Central, 30 Stamford Street, SE1 (46,628 sq ft) on a ten-year term at £62.00/sq ft with 29 months’ rent-free.
Total City supply rose by 1.4% from the 2022 end-of-year figure, to settle at 13.5m sq ft, this is the second consecutive month the City has experienced a rise. This has led to the vacancy rate moving out 10 bps to 9.7%. The proportion of tenant release space remains in line with the long-term average of 25%, albeit with a higher quantum of space.
Moreover, there continues to be an under-supply of prime stock, with 46% of current supply consisting of space that has been newly developed or comprehensively refurbished in the past ten years.
When comparing the future development pipeline to historic take-up figures, it is evident that there will continue to be an under-supply of prime to accommodate the intense demand for best-in-class stock.
The 2023–2027 development pipeline is expected to see 16.7m sq ft of speculative space complete. When comparing to a cumulative five-year Grade A take-up figure of 24.5m sq ft, there is a clear deficit that will continue to bolster prime rental forecasts. It should be mentioned that amidst relatively high construction and debt costs, there will be delayed starts and pushbacks on completion dates, which will further widen the disconnect between demand and supply. Between Q4 2021 and Q4 2022, 64% of the Central London pipeline was delayed at least one quarter.
At present, 22% of the pipeline between 2023 and 2026 has been pre-let, this is compared to 20% last year and 12% in 2021. Impressively, a little over a third of the total space expected to PC this year has been committed to (1.8m sq ft). Looking ahead, 3.9m sq ft of space is due to complete in 2024, of which 20% has been pre-let. With dwindling prime stock across the City, we anticipate an increase in demand for the space that is under construction or nearing completion.
416,398 sq ft of space went under offer last month, increasing the total figure to 2.1m sq ft, which is 50% above the long-term average. The ‘flight to quality’, as discussed over the last two years, will continue to progress as three-quarters of the total quantum space under offer is either recently developed or refurbished or still in the development pipeline.
Analysis close up
In focus: Demand analysis
With the ongoing uncertainty tainting market outlook, it is worthwhile looking into the current active requirements for the City and Central London. At the end of January 2023, there was 7.9m sq ft of active requirements, this eliminates West End-specific searches. This is 13% up on the long-term average.
Positively, there are a number of mid- to large-size bracket requirements becoming active – in the last three months, there have been an additional eleven. Conclusively, 68% of active requirements are looking for 50,000 sq ft of office space, which provides an air of positivity for the market in the coming months.
With regards to which occupiers are active in the market, the rhetoric remains similar to the last couple of years. The Insurance & Financial Services sector account for a third of all active requirements, with the Professional Services sector a close second (28%). It will be interesting to monitor the Tech & Media sector following the muted activity in the American and European markets.