Following Amazon recently pre-leasing 431,000 sq ft at Principal Place – advised by Cushman & Wakefield (C&W) – in the largest leasing transaction of 2014, central London office take-up during Q3 2014 reached 3.2 million sq ft.
This is the sixth consecutive quarter of above average quarterly take-up. This means that to date in 2014, 9 million sq ft has been leased, which is some 16% ahead of the same point last year and is already approaching the 10-year annual average of 9.2 million sq ft, with three months of the year remaining.
C&W estimates that there is around 4 million sq ft under offer, which is more than double the five-year quarterly average. The largest potential deals under offer are at TIQ Stratford – the FCA for a 425,000 sq ft pre-let and TfL for a 250,000 sq ft pre-let.
With this record level of space under offer, C&W fully anticipates that 2014 total volumes will be higher than the previous peak in 2007, when 12.6 million sq ft was let.
Compared to the peak in 2007, leasing volumes clearly illustrate the shift from west London to east London, as occupiers reconsider location strategy in response to a combination of low supply and higher rents in the West End. C&W expects the City to account for 60% of 2014 transaction volumes compared to half at the peak, while the West End will account for less than 30% down from over a third in 2007. The resurgence in Canary Wharf letting activity over the last nine months means that volumes will account for a similar proportion to the last peak – c.13%.
Pre-letting activity continues to be a major source of leasing volumes across central London, particularly for larger transactions. A total of 870,000 sq ft or 29% of total lettings were pre-lets in Q3 2014, which brings the annual pre-let volumes to date to 2.4 million sq ft. This is 16% ahead of the same point in 2013. The two largest transactions signed this quarter were pre-lets off-plan: Amazon pre-leasing 431,000 sq ft at Principal Place and Havas pre-letting 160,000 sq ft at 3 Pancras Square.
This brings the number of transactions over 100,000 sq ft in 2014 year to date (YTD) to nine, of which seven have been pre-lets. The low levels of supply, particularly in the West End where available space is at its lowest level since Q4 2007, combined with low levels of new space due to be delivered during 2015 will see larger occupiers consider pre-lets to satisfy their longer term requirements.
As well as a strengthening in gross take-up, net absorption is also increasing which reflects both the growth of existing occupiers and the setup of new operations in London. C&W estimates that net take-up in 2014 YTD is positive at just under 2.5 million sq ft, which is 40% ahead of the same point in 2013. The largest net growth is the expansion of Amazon which is relocating all corporate employees to the capital and, with the leasing of Principal Place, will have a total capacity for over 5,000 London employees.
Andy Tyler, C&W’s head of West End office agency, said: “It is clear that the recovery in the London office market has built up momentum and that activity is being driven not only by churn but by a significant number of companies expanding their London operations. The war for talent remains a key driver, particularly for the media and technology sector, and we will continue to see companies move into central London from further afield to address this issue.”
Despite the stronger leasing activity, there has not been any significant rental growth to date, especially in the City. However, C&W anticipates that this will start to change as landlords are increasing their asking rents on newly launched schemes in expectation of limited competition in the near term.
Andrew Parker, C&W’s head of City office agency, said: “The rents quoted on the newly launched Leadenhall Building are setting a new benchmark for city rental values, a trend also being noted for non-tower buildings as landlords gear up for the anticipated shortage of supply in 2015.”