Highest take-up in 19 months, as under offers are up 120% since January
August saw the highest monthly take-up in 19 months, as 533,394 sq ft was acquired across 20 transactions in the City. As we look towards the end of Q3, year-to-date take-up currently sits at 2.46m sq ft – this is up 11% on this time last year but still 31% down on the five-year average. The continued preference for Grade A space dominates take-up figures in the city, as 91% of year-to-date take-up has been of such quality.
August take-up was aided by a couple of large pre-lets. In the largest pre-let, law firm Travers Smith acquired 158,000 sq ft across floors 5–13, Stonecutter Court, 1 Stonecutter Street, EC4, on a 15-year term, understood to be at a blended rent of £76.00/sq ft and with 36 months rent-free. Following suit, Inmarsat acquired the entirety of 50 Finsbury Square, EC2 (118,231 sq ft) on a 20-year term at £70.00/sq ft.
Another notable transaction saw US law firm Skadden acquire floors 38–40 at TwentyTwo, 22 Bishopsgate, EC2 (78,243 sq ft) on a 15-year term with a blended rent of £79.50/sq ft. The law firm is set to move in 2022, following 25 years in Canary Wharf.
The Professional Services sector maintained its dominance, accounting for 53% of take-up in August. Such sustained performance means that the Professional Services sector now accounts for a quarter of year-to-date take-up. Closely behind is the Insurance & Financial Services sector, accounting for 22%.
Off the back of the pick-up in leasing activity, we saw supply fall by 20 bps, and whilst tenant-controlled space accounts for 26% of current supply, around 100,000 sq ft of tenant space was withdrawn from the market during the month. For example, Jefferies and White & Case both withdrawing their once marketed space at 100 Bishopsgate, EC3 and Austin Friars House, EC2, respectively.
City supply settled at 12.3m sq ft – this equates to a vacancy rate of 8.9%. Compared to August last year, this is up 300 bps and also unsurprisingly up on the long-term average of 6.6%. At the end of August, 85% of supply was of Grade A standard, which is in line with the five-year average. The majority of supply (61%) is within the City core and, therefore, has a higher vacancy rate of 11.2%, compared with just 6.7% in the fringe.
With the return to normality beginning to gain momentum and workers returning to the office, we have witnessed a rising demand for office space across Central London and the City. We have seen a 120% increase in the total space under offer since January 2021 (2.31m sq ft). Additionally, August saw 567,588 sq ft placed under offer - this is the highest since January 2020.
Currently, of the 9.9m sq ft of total requirements across Central London and the City, 7.5m sq ft is active demand and 2.4m sq ft potential demand. We have continued to see increasingly footloose occupational requirements and, at present, of the 9.9m sq ft of active and potential requirements, 54% are prepared to look anywhere in Central London rather than in a sub-market, reflecting building-centric preferences over location.
The development pipeline is set to supply premium office space to the market, which will feed the ‘flight to quality’ trend witnessed over the last 18 months. Between 2021 and 2024, 61% of schemes scheduled for practical completion are BREEAM rated ‘Very Good’ or higher.
Currently, 2022 is scheduled to see 4.1m sq ft of new developments and refurbishments brought to the market, of which 23% is pre-let. Looking further ahead, 2023 is set to see 3.9m sq ft brought to market, and 2024 expects 4.1m sq ft, of which 18% and 16% are pre-let, respectively.
Analysis close up
In focus: City and central London demand
This month’s In Focus takes a closer look at the pre-let market, due to the flurry of activity over the last couple of months, including the two transactions mentioned above. As we can see from the chart below, pre-lets have increased as a percentage of total annual take-up in recent years, accounting for 32% of take-up for 2021 year-to-date.
As the chart below depicts, over the last 18 months, the Professional Services sector has dominated the pre-let market, accounting for 62% of take-up in this time period. This can be partially attributed to legal firms, who are coming to the end of longer lease terms and require large, premium office space to attract and retain employees in a competitive industry.
The increasing preference for buildings with good sustainability credentials is reflected by the fact that 81% of pre-lets from 2020 to present day have been BREEAM rated ‘Very Good’ or higher, with a staggering 53% being rated ‘Excellent’.