A rush of optimism at the turn of the year has been quickly subdued by fresh challenges to occupier sentiment, including the outbreak of war in Ukraine and the recent steep rise in inflation. Though lacking in big ticket deals, office leasing activity in the south-east has remained broadly in line with the long-term quarterly average, equating to an anticipated 850,000 sq ft of take-up during Q2 2022 (vs 1.1m sq ft in Q1).
The life sciences sector has been a major brightspot post pandemic, with the Pharmaceutical & Health sector accounting for a record 20% share of the region’s take-up over the year to Q1 2022. This, in turn, has been reflected at the local level, with take-up in the life sciences epicentre of Oxford running 28% above the annual average. However, Guildford was the region’s top-performer over the year to Q1 2022, with take-up being 39% above average, driven by expansionary moves in the gaming industry.
The lack of big occupier moves has left supply relatively undented across the south-east region, with current availability of circa 15 million sq ft, largely unchanged since the end of 2020. Set within a historical context, this figure is less alarming given that it remains at 32% below its peak from the global financial crisis in 2009.
Ryan Dean, head of national office advisory at LSH, said: “With an increasing number of occupiers expected to exchange quantity for quality over the coming years, the general lack of speculative development in the south-east will translate into a real shortage of high-quality options, with a significant pinch-point emerging from 2024 and beyond in almost all markets”.
Developer sentiment remains understandably cautious, driven by a cocktail of uncertainty, high build costs and the increasing cost of finance. A relatively modest 2.1m sq ft of speculative development is currently under construction across the south-east. over half of which is accounted for by Mitsui and AIMCo’s Gateway project, White City. Just six other markets – Brighton, Watford, Oxford, Cambridge, Maidenhead and Reading – are home to over 100,000 sq ft of development.
Despite ongoing uncertainty surrounding the occupier markets and the wider economy, prime headline rents have not only proven resilient but grown in many cases. Nine of the 25 locations saw some prime rents uplift over the past 12 months, with the movement typically linked to the delivery of high new or refurbished space. A growing emphasis on quality is expected push further rental growth at the prime end, with six of the key markets forecast to see prime headline rental growth in excess of 10% from current levels by the end of 2024.
Meanwhile, evidence from the investment market suggests volume and activity have held up towards summer. The amount of stock already traded in Q2, alongside deals under offer, points to volume of circa £1bn for the quarter, marginally ahead of Q1’s £952m and above trend. Q2’s headline deal was Citibank’s £100m purchase of 1 Forbury Place, Reading from M&G (reflecting a 5.75% NIY).
Charlie Lake, capital markets director at LSH, commented: “While pricing for the very best assets appears resilient, secondary assets appear increasingly exposed. A recent surge in SWAP rates has significantly driven up the cost of debt for prospective buyers, in the process driving increased apathy towards pricing of secondary assets and those obsolete by either location or quality or those which do not benefit from strong underlying alternative use value”.
A huge weight of global capital is seeking exposure in the booming life sciences arena. Since the pandemic struck in Q1 2020, circa £3.3bn has been deployed to secure assets used by, or targeted at, science occupiers in the region, representing over a third of total volume. Oxford and Cambridge are firmly established among the world’s leading life sciences clusters and, consequently, both cities have attracted a significant share of this investment.
LSH’s south-east offices team acts on behalf of occupiers including BBC, Babcock and Axa and is mandated on schemes such as Oxford Science Park, Harwell Science Park, Here + Now Reading, Lakeside Portsmouth and The Charter Building, Uxbridge.