Q2 take-up subdued, but underlying occupier demand remains strong
Whilst leasing activity picked up in June, with 529,662 sq ft completing during the month, take-up at the end of Q2 was down 12% on the long-term average for Q2, with 1.3m sq ft transacting over the quarter.
This brought H1 take-up to 2.4m sq ft, down 15% on the long-term average, with prolonged transaction timelines continuing to have an impact on the volume of transactions completing. Though it is worth noting this is only 5% down on our prediction of the medium-term impact of agile working.
The largest transaction to complete in June was law firm Denton’s pre-let of the first to fifth floors (85,000 sq ft) at Aviva’s 1 Liverpool Street development, EC2, on confidential terms.
The increased activity seen so far this year from the Serviced Office sector was also visible in June, with four operators, Halkin, Orega, Unity Workspace and The Workhouse Company, collectively acquiring 91,000 sq ft.
The increased divergence in the market between the best quality space continues, with Grade A take-up accounting for 95% of leasing and with average Grade A rents at the end of June standing at £67.28/sq ft, up 1% on the average in H1 2022. With a pick-up in prime leasing activity, the average prime rent for the year stands at £88.99/sq ft – this was up 7% on the previous quarter.
Despite overall modest leasing activity, Insurance & Financial Services sector take-up was up 22% on the five-year H1 average. Furthermore, the sector currently accounts for 31% of active Central London and City requirements. Encouragingly, underlying demand remains buoyant, with active Central London and City requirements standing at 8.8m sq ft, which is up 28% on the five-year average. Further to this, space under offer stands at 2.6m sq ft, also up on the long-term average (by a very significant 88%). The most notable space to go under offer during the month was HSBC going under offer on 560,000 sq ft at Orion’s Panorama, 81 Newgate Street EC1 development.
At the end of June, supply stood at 13.7m sq ft – this is in line with supply at the end of Q1 and equates to a vacancy rate of 9.8%. The most notable change to supply was a slight drop in the quantity of tenant-controlled space on the market. At 3.2m sq ft, this was down 7% on the previous quarter.
Over the next five years, stated development completions stand at 19m sq ft, but 21% of this is already pre-let. However, in reality, we believe the level of completions will most likely be lower than this, with 47% of scheduled completions yet to start construction.