Central London Overview
As we began to leave the summer months behind, the general outlook was looking forward to a long winter, where through the shorter days, the pandemic would likely rear up and cause further complications through both life and business. Before this gripped, the months of October/November saw a period of continued positivity, buoyed primarily by employment and in many cases corporate growth after shedding too many jobs during previous lockdowns. Clearly the frustrations of the last few years started to settle down as people moved around the job market, and in many cases changed careers entirely. This was a quarter for the people and although there was decent activity through October, with deals competing all over London, by November the markets were clearly calming down and the pubs and restaurants were getting busier. This was further compounded as the colder weeks pushed in, followed quickly by the rise in seasonal illnesses, and therefore an increase of Covid cases. It was not long before the offices were looking a lot less busy and upon reflection this has been another tough year, with some really positive activity in parts, however it felt from the very early stages of this quarter that this was going to be an early clock off for the Christmas festivities.
The Omicron wave struck too late within the quarter to really impact figures, Q1 2022 will spell the effects and how London and the market have coped with the situation. A gut feeling would be vaccination rollout and the PM’s positive announcements of going back into the office are going to kick the negative effects from Omicron into touch and plough the market in a successful start to the year – much different from what the market saw at the start to 2021.
Q4 stayed in relative correlation to Q3 2021. This shows resilience within the market as average market rents in almost all sub-markets remained very much the same. The ‘West End’ came off best in the quarter with some typical quoting rents. Mayfair’s Grade A specifications spaces seeing rents top £100 per sq ft.
There is some concern over the ‘insurance district’ as a sub-market. Prime rents have fallen for a second quarter, consecutively. This spells early trouble for the submarket.
Thankfully as the year developed so did occupiers’ confidence due to the comprehensive rollout of the vaccine. Market activity remained strong during the final couple of months of 2021. It is estimated that tenants across the West End acted with significant confidence occupying upwards of 3.2m sq ft. across the Central London office market.
This remains the strongest of quarterly take-up recorded since the end of 2019. This is a 0.2m sq ft. increase from the 10-year average which equates to 3.0m sq ft. This is the first time we have seen an increase in quarterly averages for over 2 years showing a marked improvement in market confidence as occupiers re-introduce themselves back to London.
To summarise, 2021 was a fairly strong year for leasing bringing the total year activity up to 9.1m sq ft. While this remains below the decade annual average of circa 20%, this thankfully represents an overall increase of 63% when compared to the disastrous year of 2020.
Office asking rents remained largely unchanged during the early parts of the covid crisis, these have across the board, begun to fall. Contrary to this, this certainly isn’t the case for the prime, best-in-class market. With record rents having been achieved on Mayfair’s Berkeley Square and in the City’s Leadenhall Building since the pandemic began. Further evidence can be found in the previous quarter, with a continued onus on occupiers chasing best-in-class space, this has been demonstrated by two of the three largest deals being pre-lets.
The largest of these were 267,000 sq ft at 1 Broadgate, EC2, occupied by Allen & Overy. Other key deals included the 128,300 sq ft letting to Aspire via Studios at Red Lion Court, 46/48 Park Street, SE1 and the notable 115,500 sq ft letting to Snapchat at the Bloom Building. Other spaces under offer include 40 Leadenhall Street (284,400 sq ft) and 21 Holborn Viaduct (280,000 sq ft).
Second hand take-up increased over the quarter, marginally surpassing the average level at 1.9m sq ft. Over the year, creative industries were responsible for the largest share of take-up (21%) followed by banking and finance (19%).
Vacancy rates and availability
Throughout the course of Q4 2021, availability remained relatively steady at 26.2m sq ft, but still high relative to the 10-year monthly average of 15.4m sq ft. Total supply has exceeded trend levels since June 2020. Focussing on the second hand supply, by the end of November it remained dominant following a monthly increase to 19.5m sq ft, of which 8.7m sq ft was in units smaller than 20,000 sq ft.
The supply of newly completed space and new early marketed availability remained above trend level, accounting for 26% of the total. There were 29 units across Central London with more than 100,000 sq ft ready-to-occupy space available.
The Central London vacancy rate increased slightly to 9.4%, from 9.2% at the end of the previous month.
Sales market and construction pipeline
As the UK approached the winter and the uncertainty over WFH and hybrid working, the amount of space under construction reduced slightly to 13m sq ft from 13.7m sq ft, however certain areas saw a large uptick in new developments with Southbank seeing a 100% increase compared with 6 months ago. Despite the perils in the world economy due to many factors, developers are still keeping relatively upbeat in respect of creating new workspaces, driven in part by their need to reduce their carbon footprints and make their buildings more sustainable. Landlords are still seeing a ‘flight to quality’ with the TMT, Financial and Legal sectors leading the way in terms of pre-letting these new developments.
Leading the way in new builds and refurbs is Argent with their S3 & R8 buildings in Kings Cross swayed by Astra Zeneca taking more space within the existing St Pancras Buildings. YY London is being speculatively extended to provide a total of 408,000 sq ft in 30 South Colonnade in Canary Wharf and The Hub at 123 Buckingham Palace Road will provide just under 500k sq ft of space in Victoria.
With close to 8m sq ft of the 13m sq ft under construction at present coming to market in 2022 and 2023, what remains to be seen is the future impact of higher material prices and shortage of labour beyond the end of 2023. Whilst London will remain a hub for workspace, the cost of steel and concrete may decide the future of the development pipeline.
Flexible office market
This was a quiet quarter in comparison to the previous in terms of enquiries for office space with a start date within said quarter or even early next. The Omicron variant and fear of further restrictions caused businesses to reassess their plans for a return to the office in January 2022 and hold off until there was a clearer understanding of the severity of the new variant.
There was a total of 18 flexible workspace transactions within SHB for Q3 totalling 277 desks and a slight drop in Q4 with a total of 16 transactions but nearly an 11% increase on desks taken.
Reflective of the enquiries and briefs we were receiving from clients, Southbank and Southwark endured the most transactions for a submarket for Q3. In Q4 the submarket this was Fitzrovia, which was partly due to availability and a moderate price point but also due to the lack of availability within Soho, and clients looking to the next best option.
Enquiries were down in Q4 by nearly 12% compared to Q3 however viewings were up in Q4 by 15%.
In Q4 we saw an influx of enquiries for Victoria, however the increased demand and lack of availability make it difficult to fulfil all client’s briefs. Despite a tumultuous few years, flexible workspaces bounce back quickly in uncertain times and this is no exception. The very competitive deals on offer throughout the pandemic are a thing of the past with desk rates in most markets back to pre-pandemic levels and occupancy levels increasing dramatically. The City and Fringes are still lagging behind but more cost-effective desk rates and competition due to higher availability mean it won’t be long before more businesses look to take advantage of lower desk rates.
Whilst many businesses were demonstrating commitment & confidence in the office market, our VC & PE friends were showing their commitment in the form of cold hard cash. Investors deployed more than double the amount of capital to UK businesses in 2021 compared to 2020 with a total of £22.7b of deals completed.
Flourishing sectors unsurprisingly include AI & Life Sciences with investment in CleanTech booming in 2021 with noticeable heightened deal activity around November with the huge focus on Cop26 and the on-going climate crisis, we also noticed demand for more office space increase within this sector for our client base. Digital Security is starting to plateau after a sharp rise over the previous year and investment in Blockchain & Crypto has slowed considerably.
Leading the way for investment deals yet again, is our beloved Fintech sector. Dominating the Big & Megadeals again in 2021 with SHB’s client Checkout.com achieving another successful funding round of £333m. Megadeals doubled in 2021 and breached the 100+ mark for the first time.
With the winter months starting to close in, there is a mixed feeling of viral related dread, as well as an undercurrent of excitement, generated as the market fully expects a further positive push on the market recovery as occupiers all over the land continue to wake up. Regardless, we all need to be careful, underlined by the likely surge in corona related illnesses and a very real prospect of further, perhaps limited, lockdowns. Never the less, at SHB we are enjoying a continued recovery and this is a direct result of the incredible work ethos and coming together of people during the last 18 months. It very much feels like there is opportunity on the horizon but 2022 could turn into a troubled year as the months tick by.
Keep up to date with the latest insights and articles from SHB here.