London office take-up rose 10% in the final quarter of last year, according to new research from Gerald Eve. The company said total take-up in 2022 hit 12.1m sq ft, up 28% on 2021, but 17% below the pre-Covid five-year average.
Last year, occupiers tended to gravitate towards the best quality, most sustainable and amenity rich space, but overall space requirements remain down and occupational footprints are smaller.
In Mayfair and St James’s the availability rate fell to 4.7% in Q4, the lowest rate since before the pandemic, with overall availability broadly flat across 2022.
However, the market experienced a new high watermark for tenant-controlled sub-let availability, with circa 6.3m sq ft of ‘grey space’ on the market, accounting for a record high 29% of overall availability.
Grade A rents increased in four of the 15 submarkets covered by Gerald Eve’s research, with strong demand in the City pushing rents from £70/sq ft to £75/sq ft. Covent Garden, Midtown and the South Bank also experienced rises.
Rhodri Phillips, partner at Gerald Eve, said: “Take-up in the final quarter of 2022 was underpinned by several large commitments. Lettings of the 50,000+ sq ft size range contributed to just under 1m sq ft of activity, one of the strongest quarters in the last three years.
“Availability of Grade A space remains extremely tight and this has continued to put upwards pressure on rents, particularly for sustainable offices with the highest sustainability credentials. Pre-let activity made up 10% of the overall activity this quarter, demonstrating ongoing occupational preference for best-in-class space. Notably, two-fifths of the pipeline for 2023 is pre-let and we expect more absorption of this in the coming months.”
Office investment in Q4 came in at just under £1.6bn – one of the lowest volumes on record. The recent outward yield shift for prime central London offices has led to a sharp correction in values, with Monthly MSCI December 2022 data showing a quarterly fall of 10% in capital values since September – this is reminiscent of the rate of value decline in the early stages of the global financial crisis, according to Gerald Eve.
Lloyd Davies, partner at Gerald Eve, said: “The sharp valuation adjustment contributed to this quarter’s low activity. In the direct investment market, previously-marketed sale prices have been adjusted by 15-20%, and some sale campaigns withdrawn. During previous downturns, prime and secondary pricing has almost always diverged, with secondary properties taking the brunt of value drops.
“This year is expected to be no different, in fact it’s likely to be even more pronounced given the upcoming MEES regulations and the structural shift to hybrid working. However, with any polarisation there is opportunity. Overseas and some equity investors benefitting from interest rates arbitrage in domestic markets will be active, taking a longer-term view on the market. Stock selection and patience will be key themes for 2023.”
