Leasing activity in the Greater London and South East office market was subdued in Q1 2023, with take-up reaching 467,000 sq ft. This mirrored activity from the first quarter in 2022 with take-up, 2% above that total, but was a 39% fall on the five-year average.

Traditionally the Western Sector accounts for the highest proportion of take-up across the market. However, the Northern Sector (including Greater London's northern and eastern submarkets) was the most active in Q1 2023, accounting for 49% of take-up recorded. Stratford, Luton and Hemel Hempstead have all experienced above-average levels of take-up activity.

The majority of take-up was concentrated in the smaller deal size ranges, with 83% of deals recorded below 20,000 sq ft. There was an increase in activity in the 10,000–20,000 sq ft size band, with twelve transactions recorded in Q1 2023. This was 13% above the five-year average for this size band and double the amount recorded in Q1 2022.

There were six deals over 20,000 sq ft, which included Herrington Carmichael leasing 31,000 sq ft at Brennan House, Farnborough, for a new headquarters. Technology manufacturer, KEYENCE acquired 24,000 sq ft at Union, Stockley Park, and Arvato leased 25,000 sq ft at Botanica, Ditton Park, Slough.

Take-up in Q1 was impacted by the inertia arising from Liz Truss’s mini-budget. It is expected that activity from larger occupiers will though increase throughout the year. There are currently 2.2 million requirements in the market, with 23 requirements over 20,000 sq ft. Air Products, McDermott, Allergan, and Wood Group are all searching for over 70,000 sq ft of office space.

The flight to quality in the market has continued with demand concentrated on Grade A office space with 72% of the space transacted within Q1 being Grade A quality. This is the highest proportion since the start of the Covid-19 pandemic and has risen in three consecutive years. The proportion rises to 77% when focusing solely on the Western Sector, demonstrating that the clear occupier preference is for Grade A office space that offers strong environmental credentials.

Public Sector & Education occupiers have been the most active business sector, accounting for 42% of take-up. Education sector is a notable growth sector in the region, which has been underpinned by an increase in student numbers. According to HESA, there were 423,935 students in London at the end of the 2021/2022 academic year, which represents a 15% increase in the last five years. This equates to an additional 56,695 students.

Submarkets within the Greater London office market have benefitted from the expansion of the Education sector. Annual take-up of over 200,000 sq ft was recorded from the sector between 2019 and 2022. A further 144,000 sq ft has been acquired by Education occupiers in Q1 2023 across this market area. Teesside University, LMA, and Fairfield School of Business have all opened new sites or expanded their existing footprint across the region in the first quarter of the year.

There are pockets of undersupply amidst a limited development pipeline

At the end of Q1 2023, there has been a marginal increase in supply, with a 1% rise since the end of 2022. Supply levels now amount to 15.4 million sq ft, which is 3% above the ten-year average. The Western Sector still holds the greatest provision of Grade A supply, with 65% of such space located in this geographic region. Although supply has increased overall, several submarkets are experiencing supply constraints. Windsor, St Albans, Guildford and Watford all have below two years of Grade A supply based upon average take-up levels, which Savills considers as undersupplied.

The development pipeline is constrained with 1.6 million sq ft of available space currently under construction. This equates to six months of take-up in an average year. New development and comprehensive refurbishment announcements have been limited this year amidst rising finance and build costs.

Rental growth continues on best-in-class space

Rental growth has continued in the market for the best-in-class stock, with occupiers prepared to pay premium rents to secure the best quality space. This was exemplified in Hemel Hempstead, Stratford and Stockley Park, where record-high headline rents were all achieved in Q1 2023.

This trend is expected to continue with the supply of prime Grade A space limited, with only 9% of current availability meeting this standard.

The polarisation in occupier demand has resulted in rental falls for secondary properties. Average Grade B rents have fallen consecutively for the last three years and currently stand at their lowest level since 2015.