Occupier demand puts squeeze on central London office space

Following a bumper year in 2018, demand for central London office space carried through into 2019 with 6.9 million sq ft let in the first half of the year, according to Gerald Eve’s latest London Markets research. Whilst take-up was down on the equivalent period last year, demand remains in line with the five-year average and seems broadly positive against a backdrop of continued uncertainty surrounding Brexit.

The ability to recruit and retain the best talent has led to occupiers targeting higher quality office space and over the last 12 months, 48% of lettings were for new space, compared to the five-year average of 39%.

Occupier demand for central London office space generated 19.4 million sq ft of take-up in the past 18 months and eroded the availability rate to 4.9% across the capital. The development pipeline is ostensibly healthy, with 11.3 million sq ft of office space under construction, although 43% of this is already let, meaning the true figure of available new future supply is only around 6.4 million sq ft.

This squeeze on supply has had an inevitable impact on rents, with positive rental growth for more than half of the central London sub-markets (Marylebone, Mayfair/St James’s, Paddington, Fitzrovia, Covent Garden, Midtown, Farringdon/Clerkenwell, Shoreditch and Southbank) in the first half of 2019. Rents in the remaining markets (Knightsbridge, Victoria, Soho, King’s Cross, City and Canary Wharf) were unchanged over the past six months. None of the central London markets covered by the report experienced any decline in rental values in 2019.

The finance & banking sector has been particularly confident in the London office market, accounting for a commanding 29% of all lettings over the last six months, more than any other business sector. Media & Technology occupiers were also active and continue to be one of the main drivers of occupier demand across the capital, accounting for 19% of deals in 2019 so far.

Serviced office providers accounted for 14% of activity in the first half of 2019. WeWork was particularly active and took 255,000 sq ft across the capital. The increased flexibility offered by serviced office providers has lured smaller firms that might previously have signed conventional deals elsewhere. Consequently, the availability rate for smaller offices has gradually increased since 2015.

Lloyd Davies, partner at Gerald Eve, said: “A visible depth of occupier demand, coupled with the impending squeeze on availability, has ensured that central London offices remain an attractive asset class. Whilst some Far Eastern investors scaled-down activity in the first half of 2019 due to the ongoing political and economic uncertainty, we are now seeing increased demand from Asia as sterling weakens and their own domestic turbulence plays out. Rental growth is likely to remain consistent – if fairly conservative – for the foreseeable future and we also predict opportunities to drive capital values through the repurposing of some existing retail stock into office-led developments.”

Patrick Ryan, partner at Gerald Eve, added: “Robust leasing activity across most of the central London sub-markets demonstrates the fundamental strength of the market and the occupational demand that has underpinned take-up – driven by lease expiries, obsolescence and expansion – has continued, despite the continuing economic and political uncertainty. Short of a mass exodus of significant occupiers in the banking and finance sector, the central London office market looks set to maintain momentum given an inability for significant new development to be introduced quickly.”