Take-up of office space in London shot up by more than 30% in the third quarter to 2.9m sq ft, driven by demand from the finance and banking sector, reveals new research from Gerald Eve.
As well as being almost a third higher than in the second quarter, take-up was 5% above the five-year quarterly average.
Most transactions were for high-quality accommodation expected to meet all Energy Performance Certificate regulations by 2030, underlining the importance of sustainable workspaces to occupiers. Pre-letting accounted for nearly a fifth of the total.
The finance and banking sector represented more than one fifth of all leasing activity and was particularly active pre-letting space of more than 20,000 sq ft. Activity from serviced office occupiers remained steady, with the segment recording two consecutive quarters of take-up in excess of 100,000 sq ft for the first time since 2019.
WeWork’s renegotiation of existing leases in London was likely to provide further opportunities for the sector, according to the research.
Despite the uplift in demand, the overall availability rate was effectively unchanged at 9.1%. The research also showed a slippage in the delivery of new development, with 1m sq ft of schemes originally scheduled for Q3 now expected to complete in Q4, while 500,000 sq ft expected to complete in Q4 has now slipped to Q1 2024.
Speculative developments could face further delays on the back of increased financing margins, warned Gerald Eve.
The firm noted that with an estimated 6.2m sq ft of new development currently under construction, a refurbishment pipeline of 4.4m sq ft and WeWork’s renegotiation of 3.3m sq ft in London, there would a significant increase in supply over the next 12 to 18 months. There was likely to be an influx of secondhand space in submarkets with a large WeWork presence, such as the City, Southbank and Canary Wharf, it said.
Mayfair/St James’s and the City were the only areas to record an increase in Grade A rents in Q3, rising £10/sq ft to £150/sq ft and £2.50/sq ft to £77.50/sq ft respectively.
Commenting on the occupational market, Gerald Eve partner Rhodri Phillips said: “There is robust demand for best-in-class office space in the core West End, especially from the finance and banking sector. Availability in the wider West End fell to 6.4% in Q3, with Mayfair/St James’s and Marylebone now below 5%. The volume of existing and new supply coming forward will not be enough to absorb the current level of occupier interest for best-in-class offices. Competition will place further upward pressure on top-end rents, with West End rental growth expected to outperform other locations.”
The volume of investment transactions increased in Q3 to £1.4bn across 29 transactions. However, the average deal size remained low at £48m, reflecting the difficulty in sourcing debt for larger acquisitions.
Commenting on the investment market, Gerald Eve partner Lloyd Davies said: “Investment activity in smaller lot sizes shows the prevailing concerns in raising debt for large purchases, but well-capitalised investors are selectively looking for opportunities in value-add space. Debt liquidity for secondary office acquisitions has thinned this year as lenders are less willing to take on risk associated with reletting and development. Where the right product can be delivered closer to the core, that picture improves.”
