Savills City Office Market Watch: Expect a busy final quarter with 2.8m sq ft currently under-offer in the City

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

Take-up for August reached 421,421 sq ft across 26 deals, resulting in the total for the year reaching 3.9m sq ft, which is down on this point last year by 13%. However, this is in-line with the 10-year average to the end of August. This brings the 12-month rolling total to 7m sq ft, of which 85% has been of a Grade A standard, compared with the long-term average of 67%.

We saw an additional 1m sq ft of space go under-offer last month, notable large potential deals include all of the upper floors at Wenlock Works, N1 (105,000 sq ft), levels ground and fourth to sixth at Broadwalk House, EC2 (121,000 sq ft), IPG are rumoured to be under-offer on 91,000 sq ft at 16 Old Bailey, EC4 and Rabobank are believed to be under-offer on circa 119,000 sq ft at The Bloom, EC1.

This brings the total amount of space currently under-offer in the City to 2.8m sq ft, which is up on the long-term average by 116%, and the highest since August last year, but also the second highest since our records began in 2005. Therefore, we can expect to see an active final quarter and it is now very likely that total take-up for the year will surpass 6m sq ft, which seemed highly unlikely at the end of Q1.

The largest deal to complete in August saw Convene acquire levels 3 – 6 at TwentyTwo Bishopsgate, EC2 equating to 99,297 sq ft. The US-based serviced office provider has chosen this space to be their first international location outside of the US. The flexible workspace operator acquired the space at a rent of £65.00/sq ft on a straight 15-year lease. The building is expected to complete in Q1 next year, with the Convene offering ready in September.

Also in August, we saw international law firm Kinglsey Napley LLP acquire levels G – 5 at the new refurbishment Twenty Bonhill, EC2, which is due for completion in Q3 next year. They will be relocating from Clerkenwell where they currently reside in three buildings and will move into the new space in January 2021. They agreed a 15-year lease with no breaks at a rent of £62.00/sq ft with 36 months rent-free.

Total City supply slightly rose last month by 2.4% and currently stands at 6.6m sq ft, equating to a vacancy rate of 5.1%, which is down on August 2018 by 40 bps, and down on the long-term average by 150 bps.

However, while supply is low across the City as a whole, it varies quite notably on a postcode basis. For example, EC4 is the most constrained market with a vacancy rate of just 3%, followed by EC1 at 4.5%. The majority of the available supply in the City is concentrated in the square mile, with EC2 having a vacancy rate of 5.2%, but EC3 is significantly in front at 9.4%.

As expected, the average Grade A rental growth in these markets over the last year has been influenced by the level of the vacancy rate. EC3 and EC2, which have the highest vacancy rates, have also seen the smallest rental growth over the last year at 1.3% and 3.4% respectively. This is compared to EC4 and EC1 which are more constrained and have seen rental growth of 5.7% and 8.2% respectively.

However, there is only a combined 2.3m sq ft of new speculative space expected to arrive in EC2 and EC3 next year, of which circa 0.5m sq ft is currently under-offer and expected to complete before the year-end. Therefore, there is just approximately 1.8m sq ft of new space being delivered into EC2 and EC3 next year, and the combined five-year average Grade A take-up for these postcodes is 3m sq ft, suggesting vacancy rates here could fall, and we could witness stronger rental growth.