Savills’ City Office Market Watch: Demand being driven by Insurance & Financial services

Savills has released its latest monthly report looking at the City occupational markets:

Take-up for May reached 498,322 sq ft across 27 deals, resulting in the total for the year reaching 2m sq ft, which is down on this point last year by 29%, and down on the 10-year average for this time period by 8%. This brings the 12-month rolling total to 6.9m sq ft, the lowest it has been since July 2017.

The demand for space in the fringes of the City appears to have been reduced this year. The City core has accounted for 68% of take-up at the end of May, with the fringes accounting for the remaining 32%, which is down on the five-year average of 46%.

The largest deal to complete in May saw the financial advisors Brewin Dolphin acquire the whole of 25 Cannon Street, EC4 (114, 388 sq ft). They acquired the space from developer Pembroke at £68 sq ft, on a straight 15-year lease believed to commence in August 2021, with the relocation happening in July 2022. They will be moving from their current location at 12 Smithfield Street, EC1, where they have been for 12 years.

Also in May, we saw Brewin Dolphin competitor Smith & Williamson acquire 86,975 sq ft across levels ground to fourth with part of the fifth at Gresham St Pauls, 40 Gresham Street, EC2. They have acquired the AFIAA/Stanhope scheme also at £68 sq ft and will be relocating from their current offices at 10 and 25 Moorgate, EC2 when the scheme completes in Q3 2020.

The Insurance & Financial services sector is driving demand in the City currently with 27% of the share of take-up, with the Serviced Office Provider sector coming in second with 18% share, and the Professional services sector in third with 11%. However, it is very surprising to see the Tech & Media sector has only accounted for 8% at the end of May, equating to just 157,209 sq ft, down on this point last year by 55% and the 10-year average to the end of May by 50%. An explanation could be that Tech & Media occupiers are choosing to move into serviced offices, who continue to expand despite widespread caution. The Serviced Office Provider sector has seen 363,349 sq ft of take-up so far this year, up on this point last year by 78% and up on the 10-year average to the end of May by 199%.

Total City supply at the end of May stood at 6.6m sq ft, falling by 1.8% on the end of last month and equating to a vacancy rate of 5.1%, which is down on May 2018 by 70 bps, and down on the long term average by 150 bps. However, this will increase at the end of Q3 when we include all schemes due to complete in Q1 2020 into current supply. This will include 22 Bishopsgate, EC2 which still has circa 1m sq ft of space remaining, although we believe approximately 200,000 sq ft is currently under-offer here.

Another explanation as to why take-up in the fringes is down this year, could be the lack of supply available there. There is currently just 2.7m sq ft of available supply in the Northern & Eastern fringe, Midtown and the Southbank combined, which equates to a vacancy rate of just 3.9%.

The limited supply seems to be having a positive effect on rents across all submarkets of the City, although we are also seeing a decrease in the differential between the markets. At the end of May, the average Grade A rent in the City core is £64.90/sq ft, up on last year by 3.2%. Meanwhile, the average Grade A rent in the City fringes has risen 9.8% on last year, currently settling at £64.82/sq ft. This is just an £0.08/sq ft difference between the two markets, compared with a difference of £3.86/sq ft last year.