City under-offers at record level whilst leasing activity remains subdued
July take-up reached 419,029 sq ft across 34 transactions. Whilst this was the highest monthly take-up we have seen for July since 2019, year-to-date take-up, at 2.88m sq ft, remains 17% down on the long-term average for this period.
July leasing was boosted by pre-lets at M&G Real Estate’s 40 Leadenhall development, EC3, which accounted for over a third of the month’s leasing activity, with Kirkland & Ellis having exercised its option on the 15th to 18th floors (85,000 sq ft). This is in addition to its pre-let of the 19th to 34th floors last year. The other pre-let to occur at 40 Leadenhall was on the part 8th and 9th floors, with Acrisure RE acquiring 60,000 sq ft on confidential terms.
In spite of below-average levels of leasing activity, space under offer continued to increase in July, with a further 362,280 sq ft going under offer. Overall space under offer stood at 2.8m sq ft at the end of the month. This is up on the long-term average by 104%, with transaction timelines continuing to remain elevated, though the average time deals are taking to complete has come in from seven months to 6.4 months.
Similarly, high levels of underlying demand are also reflected by the rising levels of active Central London & City requirements. In July, active requirements increased by a further 6% to 9.3m sq ft. This is up 27% on the five-year average as we continue to see strong levels of demand from the Insurance & Financial sector.
Overall supply stood at 13.5m sq ft, which equates to a vacancy rate of 9.7%. This was down 10 bps on the previous month, partly as a result of the continued reduction to tenant-controlled space, with tenant space falling by another 4% to 3m sq ft. This is the lowest level of tenant-controlled space in two years, with more businesses recalling employees to the office or setting minimum weekly office days.
The increased divergence in the market between the best quality space continues, with the average prime rent at the end of July standing at £88.27/sq ft, which is up 2% on the same period a year earlier (in line with our prime rental forecast for this year); meanwhile, the average Grade B rent was down 4% on the same period, and we expect this gap will continue to become more pronounced over the remainder of the year. Between now and 2027, we are forecasting prime rental growth of 3.4% per annum, and negative rental growth of -0.7% for Grade B space.
We are currently anticipating development completions will reach 3.9m sq ft this year. This is down 22% on the 4.9m sq ft we expected at the start of the year, with some schemes being moved out in 2024.