Corporate requirements set to boost take-up in the second half of the year after muted activity in H1
Take-up across the Greater London & South East market at the end of H1 2023 was subdued, with 895,000 sq ft recorded, which was 37% below the five-year average. The current challenging macroeconomic environment has weakened office demand in the first half of the year, with office relocations being delayed or taking longer to conclude. Take-up levels in Q2 broadly mirrored what was experienced in Q1, with take-up reaching 427,000 sq ft, only 8% below the previous quarter. The Western Sector continues to be the most active geographic region of the market area, accounting for 40% of wider market take-up.
Smaller occupiers have been the most active across the market with 83% of deals recorded being below 20,000 sq ft. There has been a lack of corporate activity in the market, with 12 deals recorded above 20,000 sq ft, which is 29% below the five-year average.
The polarisation in occupier demand between Grade A and Grade B buildings is becoming more evident as demand is focussed on best-in-class office space with strong environmental accreditations
Andrew Willcock, Head of Greater London & South East Office Agency
Notable transactions included LGC leasing 48,000 sq ft of laboratory-enabled space at The Priestley Building, Surrey Research Park, Guildford. The University of Creative Arts acquired 35,000 sq ft at Parkside House, Epsom, highlighting the continued growth of the education sector across the Greater London and South East office market.
The polarisation in occupier demand between Grade A and Grade B buildings is becoming more evident as demand is focussed on best-in-class office space with strong environmental accreditations. This flight to quality in the market is reflected in the Grade A proportion of total market take-up being at its highest level ever recorded, with 78% of take-up recorded as Grade A.
Public Sector & Education occupiers have been the most active business sector, accounting for 32% of take-up in H1 2023, underpinned by a growth in student numbers across the region. Insurance and Financial Services have also seen above-average levels of take-up for H1 amounting to 71,000 sq ft. A notable deal for this sector was Gallagher Insurance leasing 22,000 sq ft at Eastwood House, Chelmsford.
There has been a contraction in demand from technology occupiers, with take-up recorded from the sector 74% below the five-year average for H1 2023. The fall in demand from the technology sector can partly explain the reduction in take-up recorded across the market. The sector is traditionally the most active occupier type, accounting for the highest level of annual take-up over the last five years.
Whilst take-up has been muted in the first half of the year, it is expected that the second half of the year will experience higher levels of leasing activity. There is currently 939,000 sq ft either under offer or in advanced negotiations with 38 requirements above 20,000 sq ft. Notable requirements include McDermott, PepsiCo, Wood Group, Mott MacDonald and Abbvie all searching for over 50,000 sq ft.
Supply levels marginally rising with the development pipeline remaining limited
At the end of H1 2023, there was 15.6 million sq ft available across the market area which represents a 2% increase since the end of 2022. The increase in supply has predominately been caused by secondary space being returned to the market, since 2020 the availability of Grade B space has increased by 18%. The greatest provision of Grade A space is located in the Western Sector, accounting for 65% of overall Grade A supply.
The development pipeline remains constrained with relatively high build and finance costs weakening developer appetite to speculative develop across the market. There is currently 1.7 million sq ft under construction or comprehensive refurbishment, which equates to six months of take-up.
Record high headline rents continue to be achieved despite the challenging economic climate
New rental highs continue to be achieved in best-in-class buildings, exemplified at The Create Building in Crawley, which achieved the highest headline rent ever recorded in the town. The new development was speculatively developed by Crawley Borough Council and offers 77,000 sq ft of prime Grade A office space.
This trend is set to continue. We are aware of further record-high headline rents that are set to be achieved across other submarkets later in the year. Incentives are, however, moving out, reflecting the challenging macroeconomic environment.