Publication

City Office Market Watch

With requirements and under-offers on the rise, we are anticipating an active Q2


Market comment and notable deals

While there is a sense of nervousness in the market due to the current political climate, the frequency of deals being completed should help provide some much required assurances for the London office market. There were a total of 42 deals in February alone, bringing the total for the year to 67, which is the most for this time period since 2016, and up on the 10-year average by nine deals. Although, to the end of February, there have only been eight deals over 10,000 sq ft, resulting in the average deal size being just 7,660 sq ft.

Take-up for February reached 274,698 sq ft, resulting in the total for the year reaching 538,269 sq ft, which is down on this point last year by 18%, and down on the 10-year average for the first two months by 29%. This brings the 12-month rolling total to 7.48m sq ft, which is up on the five-year average by 2.7%.

The largest deal to complete in February saw global tobacco firm Philip Morris acquire part of the fourth floor totalling 48,000 sq ft at 1 New Change, EC4 on an assignment from K&L Gates for £61.00/sq ft on a lease until 2031.

Also in February, WeWork continued with their expansion plan and acquired the whole of 40 Mitre Street, EC3 (13,799 sq ft). The serviced office provider took the space on a lease at £55.00/sq ft, for an undisclosed length of time.

At the end of February, the Insurance & Financial services sector has accounted for the greatest amount of take-up this year at 17%. They are followed by the Extraction & Utilities sector who have accounted for 15%, largely due to Bulb acquiring 76,000 sq ft at 155 Bishopsgate, EC2 in January. The TMT sector is continuing to show good levels of demand for City office space, accounting for 13% of total take-up (Graph 1).

Graph 1

GRAPH 1 | City take-up by business sector (2019) 
Source: Savills Research

Total City supply at the end of February stood at 6.7m sq ft, rising by 3.6% on the end of last month and equating to a vacancy rate of 5.2%, which is down on February 2018 by 40 bps, and down on the long term average by 140 bps.

At the current rate of demand, we believe there is only 10.7 months of supply remaining if no more supply was added to the market (Graph 2). This is well below the 10-year average mark of 17.4 months, suggesting the market is still in the landlords favour.

Graph 2

GRAPH 2 | Supply & demand balance
Source: Savills Research

While we are not forecasting rental growth in the City this year, it is evident that good buildings in good locations are still achieving high rents. So far this year, the average grade A rent is £64.97/sq ft, which is up on the same period last year by 8.7%. While this may be more of a function of analysing a small data set, it is still encouraging to see how the level of low supply and constant levels of demand for City office space is ensuring that the high levels of rent are at least maintained and in some instances leading to rental increases.

We are expecting the second quarter to be more active than the first, due to the number of requirements for City and Central London office space has risen to 9.9m sq ft. This is up on the 12-month average by 5%, and up on the five-year average by 12%.

Furthermore, the total amount of space currently under-offer rose last month to 2.03m sq ft, which is up on the long-term average by 56%. This doesn’t even include BT, who are rumoured to be under-offer for circa 200,000 sq ft on the future Aldgate development One Braham Street, E1. This will help keep supply low in this market which is expecting four schemes to complete in 2020 currently amounting to 732,539 sq ft of supply.



Analysis close up

Table 1

TABLE 1 | Monthly take-up
Source: Savills Research

Table 2

TABLE 2 | Supply
Source: Savills Research
Completions due in the next six months are included in the supply figures

Table 3

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

Table 4

TABLE 4 | Development pipeline
Source: Savills Research

Table 5

TABLE 5 | 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 6

TABLE 6 | Demand & Under Offers
Source: Savills Research
Demand figures include central London requirements

Table 7

TABLE 7 | Significant February transactions
Source: Savills Research

Table 8

TABLE 8 | Significant supply
Source: Savills Research