West End Office Market Watch

Pre-lets help to boost February take-up in the West End Office market

Supply and demand snapshot

Leasing activity in February reached 547,604 sq ft across 23 transactions. Whilst the number of transactions reflects the continued air of trepidation and was the lowest volume in over five years, the quantum of space taken suggests that, on the whole, occupiers have remained undeterred by the current political uncertainty.

Overall take-up for the month was the largest sq ft on record for a February, with leasing activity being boosted by pre-lets. So far this year 754,376 sq ft has been let, up 24% on the long-term average for the same period and we are anticipating that leasing activity over the first quarter of this year will reach around 1.1m sq ft.

Graph 1

GRAPH 1 | January – February take-up
Source: Savills Research

Continued confidence was further marked by the amount of space that remains under offer, which increased to 1.3m sq ft at the end of February, remaining substantially above the long-term average of 650,000 sq ft. In addition to this, we also saw a further 600,000 sq ft of new West End & Central London requirements over the month bringing the total demand we are tracking to 4.7m sq ft, its highest point in eight months. As a result of increased demand over the first couple of months of this year, we expect leasing activity to pick up over the second quarter.

The largest transaction to complete in February was Sony’s pre-let of 1st – 7th floors, (125,000 sq ft), at S1, 4 Handyside Street, N1C, on confidential terms. The other notable pre-let to complete was at 127 Kensington High Street, W8, with Spaces (Regus) acquiring the ground to 3rd floors (69,330 sq ft), on a 15-year lease. Another notable transaction to complete over the month was at 25 Wilton Road, SW1, with Spaces (Regus) taking the entire building (82,555 sq ft) on a 17-year lease on confidential terms.

Almost one third of the volume of transactions to complete in the first two months of the year have been concentrated around the Soho and North of Oxford Street East sub-markets.

So far this year the Tech & Media sector has accounted for just under 200,000 sq ft of space let, 27% of take-up. Over the month four further lettings to Serviced Office Providers boosted the sector’s overall share to 19% of take-up. The remainder of take-up has been fairly evenly spread with the Insurance & Financial, Extractions & Utilities and Public Services sectors each accounting for a 12% share.

Graph 2

GRAPH 2 | Take-up by sector 
Source: Savills Research

The vacancy rate remains stable and current supply stands at 4.8m sq ft, equating to a vacancy rate of 4.0%, up 10 bps on the previous month. Current supply equates to 12 months of take-up at the average annual take-up over the past five years.

Whilst we are not expecting to see any rental growth this year, average Grade A rents stood at £76.74 per sq ft at the end of February, up 7% on average rents over Q4 2018. Over 2019 so far rent-free periods for 10-year leases with a fifth year tenant break option have remained at the same level of 20 months. Low supply and continued strong demand for space across the West End are continuing maintaining rents and incentive levels, despite signs that many occupiers have become price sensitive as a result of the ongoing Brexit negotiations.

For larger occupiers the very restricted supply of prime offerings able to accommodate requirements of a significant quantum is creating increasing competition for prime space in core sub-markets (St James’s & Mayfair), and as a result prime rents for this product continue to remain stable.

Analysis close up

Table 1

TABLE 1 | Monthly take-up
Source: Savills Research

Table 2

TABLE 2 | Supply 
Source: Savills Research

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
Completions due in the next six months are included in the supply figures
*Average prime rents for preceding three months
** Average rent free on leases of 10 years for preceding three months

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