Take-up in Q4 2023 is the highest quarterly total since 2018, bringing the annual total in line with 2022
Summary
Over the course of 2023, take-up grew throughout the year after a slow start in H1, which resulted in annual take-up reaching 2.7 million sq ft, which is 17% below the five-year average and 5% below the 2022 total. Additionally, for the first time since 2018, supply has started to fall and record rents have been achieved in several sub-markets throughout the year.
Leasing activity improved in the second half of the year, which culminated in annual take-up reaching 2.7 million sq ft. This was 5% and 17% below 2022 and the five-year average, presenting an initial indication of the market achieving a stabilised take-up level after the Covid-19 pandemic. The increase in leasing activity was notable in H2 2023, with take-up 93% above the total recorded in H1 2023. The challenging macroeconomic environment resulted in transactions either being delayed or taking longer to conclude in the first half of the year.
Positive leasing momentum built throughout 2023, with Q4 2023 take-up reaching 1.1 million sq ft, which was the highest quarterly total since Q4 2018. This take-up level can predominately attributed to an increase in deals recorded over 20,000 sq ft, amounting to 16, but in particular, the rise in deals over 50,000 sq ft, with four deals recorded in Q4 2023. The uptick in activity in medium-sized occupiers was evident throughout the year, with 32 deals recorded between 20,000 and 50,000 sq ft, 45% above the total recorded in 2022.
The improved sentiment can largely be attributed to corporate occupiers gaining a clearer understanding of their workspace requirements, greater certainty over the macro-economic outlook and moving early, well in advance of their lease expiries to secure the dwindling supply of prime, Grade A offices.
The largest deals recorded in Q4 included Lonza, which acquired a cleared site of 184,500 sq ft, previously known as the Murdoch, Hutton and Faraday buildings in Thames Valley Park, Reading, for £35 million. It is proposing to use this space to create a 400,000 sq ft office, R&D and manufacturing facility. Wood Group also leased 119,000 sq ft at 400 Longwater Avenue, Reading and Air Products leased 78,000 sq ft at 1000 Hillswood Park, Chertsey.
Throughout 2023, it was clear that occupiers favoured the best-quality spaces, with Grade A space accounting for 69% of overall take-up
Andrew Willcock, Head of Greater London & South East Office Agency
These deals have highlighted the increased activity from the Manufacturing & Industry sector (including pharmaceutical occupiers), which has been the most active business sector in 2023, accounting for 35% of take-up. Other notable occupiers who have acquired more than 20,000 sq ft in 2023 included Stanley Black & Decker, EasyJet, and Nomad Foods.
Notable submarkets that experienced high levels of occupier demand in 2023 included Reading, Guildford, Maidenhead, Slough, Croydon, Woking and Farnborough, all of which performed above their five-year average take-up levels. The Western Sector continued to be the most active in the market during 2023, accounting for 44% of take-up.
Throughout 2023, it was clear that occupiers favoured the best-quality spaces, with Grade A space accounting for 69% of overall take-up. When removing owner-occupier transactions, the Grade A proportion rises to 80%. We expect this momentum to continue into 2024, with demand for prime Grade A offices becoming more prevalent as 41% of space that has completed construction in 2023 or is scheduled to complete in 2024 has been let during construction or is currently under offer, which will support the significant rental growth we anticipate to materialise over the course of 2024.
Supply starts to fall for the first time since 2018
Supply levels across the market area, including all grades, have started to fall marginally by 1% since the end of 2022, with 15.1 million sq ft available. This is 1% above the ten-year average, however, this is the first time since 2018 that supply has started to fall. The market vacancy rate is currently 8.8%, with the Grade A vacancy rate at just 4.5%. The provision of Grade A space is skewed towards the Western Sector, accounting for 64% of Grade A supply. We expect there to be a rise in available secondary office space, as over the next five years, 74% of lease expiries involve tenants who have occupied their space for over ten years at point of expiry. The majority of these tenants are expected to relocate, with these buildings requiring significant refurbishment to appeal to a modern occupier’s requirement.
Development activity was limited in 2023, with seven schemes completing. The pipeline is constrained, with only 1.6 million sq ft of available space under construction. This equates to six months of take-up in an average year, demonstrating the future supply shortage of prime Grade A office space.
Best-in-class buildings continue to set new record rents across the market
Throughout 2023, we have seen several submarkets achieve new headline rents for best-in-class, amenity-rich office space. The dwindling supply of prime Grade A space means occupiers are prepared to pay a premium to secure this type of product. This was evident in 2023 as record rents were achieved in Maidenhead, Crawley, Stockley Park, Chertsey, Reading and Bracknell. Notably, Maidenhead and Crawley experienced 37% and 32% prime headline rental growth in 2023, where £51.00 per sq ft and £37.50 per sq ft were achieved.
New rental tones will continue to be set throughout 2024, with seven submarkets currently predicted to achieve record rents for buildings under construction or comprehensive refurbishment. This trend will accelerate the polarisation in rental performance between prime and secondary buildings.