City Office Market Watch

The City continues to defy sceptics with rents at record levels with just a quarter remaining

Market comment and notable deals

  • Take-up picked up in September with 769,837 sq ft being transacted, of which Grade A accounted for 81%. There were a total of 40 transactions with an average deal size of 19,246 sq ft.
  • This brings total take-up for 2018 to 5.1m sq ft, which is just 1% down on this point last year, but 18% up on the 10-year average for take-up to the end of Q3. There have been a total of 313 transactions so far this year, which is down on this point last year (329), but up on the 10-year average of 295.
Table 1

TABLE 1 | Key September stats
Source: Savills Research

  • At the end of Q3, the City fringe has only accounted for 35% of take-up, significantly down on last year (47%), but slightly up on the 10-year average (34%).
  • Last month saw TP ICAP pre-let levels 2 - 4 & 11 (122,525 sq ft) at 135 Bishopsgate, EC2 on a 15-year lease. The refurbished British Land scheme is scheduled to complete in Q1 next year. The remaining space is either under-offer or under-option.
  • Also in September, LinkedIn pre-let the whole of The Ray, 119 Farringdon Road, EC1 (82,910 sq ft). The tech company will move from its current location at Castlewood House on New Oxford Street.
  • Insurance & Financial services continue to be the source of the majority of demand in the City, accounting for 20% of take-up at the end of Q3. However, the Tech & Media sector is close behind as expected, accounting for 19%. Appetite from Serviced Office Providers remains strong, as they account for 12%.
Graph 1

GRAPH 1 | City take-up by quarter
Source: Savills Research

  • The average prime rent for 2018 at the end of Q3 is £79.69/sq ft, which is up on last year by 6.5%, and is currently the highest annual average prime rent on record with just a quarter to go.
  • The average Grade A rent is £61.25/sq ft for 2018, which is up on last year by 0.4%, and is also currently the highest annual average Grade A rent on record.
  • A recent trend over the last few years has seen the difference between the average Grade A rent in the City core and the City fringe become smaller, to a point where just £0.91/sq ft separated them last year. However, this difference has increased significantly this year to £4.24/sq ft, which is likely a function of a lack of new supply in the fringe this year that would be able to command high rents.
  • Total City supply at the end of Q3 stood at 7m sq ft, equating to a vacancy rate of 5.6%, which is down on this point last year by 50 bps, and down on the long term average by 100 bps. This is the eleventh consecutive month of the vacancy rate being sub 6%.
  • Currently, 74% of supply is of a Grade A standard, which is down on the 5-year average of 84%.
  • The majority of supply (64%) is within the City core, and therefore has a higher vacancy rate of 7.7% compared with just 3.7% in the fringes.
  • If we assume that no more supply is added, at the current rate of demand (avg 12-month rolling take-up), then there is only 11.5 months worth of supply, which is significantly below the oversupply trigger point of 20 months.
Graph 2

GRAPH 2 | City rents
Source: Savills Research

Analysis close up

Table 2

TABLE 2 | Monthly take-up
Source: Savills Research

Table 3

TABLE 3 | Year-to-date take-up
Source: Savills Research

Table 4

TABLE 4 | Rents
Source: Savills Research
*Average prime rents for preceding three months
** Average rent free on leases of 10 years with no breaks for preceding three months
N.B. We have amended our historic stock figures, resulting in a slight change of our historic vacancy rates (Aug 2015)

Table 5

TABLE 5 | Supply
Source: Savills Research
Completions due in the next six months are included in the supply figures

Table 6

TABLE 6 | Development pipeline
Source: Savills Research

Table 7

TABLE 7 | Demand & Under Offers
Source: Savills Research
Demand figures include central London requirements

Table 8

TABLE 8 | Significant September transactions
Source: Savills Research

Table 9

TABLE 9 | Significant supply
Source: Savills Research