Occupier demand for London offices has fallen for the second consecutive quarter, according to research from Gerald Eve.
Take-up stood at just under 2.2m sq ft in Q2, down 8% on Q1 and 22% below the five-year average.
Researchers said that, barring the lows during the pandemic, Q2 marked one of the quietest on record for leasing activity since the global financial crisis, with smaller lettings below 20,000 sq ft particularly affected.
The report noted the market continues to be “sharply” polarised, with a high amount of occupier activity for top-quality offices but limited across the rest of the market.
Availability rates in those outperforming submarkets were “well below” the London average. In contrast, there were further increases in Canary Wharf, Midtown and South Bank in Q2.
Canary Wharf’s office availability rate was just over 18%, the highest among the London submarkets. That accounted for almost a third (2.1m sq ft) of all central London tenant-controlled space for sublet.
In Midtown and South Bank, new waves of incoming development and a dip in occupier demand have also led to increases in availability, of 9.1% and 10.2% respectively.
Finance and banking was the most active occupier sector in Q2, with just over one-fifth of leasing activity. Law firms accounted for three of the top five largest deals, with Taylor Wessing’s 150,000 sq ft letting at 5 New Street Square, EC4, the largest in Q2.
Demand was buoyant for best-in-class stock in Mayfair and St James’s, with Chanel’s 80,000 sq ft prelet at 36 Berkeley Square, W1, the largest letting in the West End. That submarket, along with Fitzrovia, Marylebone and Covent Garden, recorded an increase in headline grade-A rents to record highs in Q2.
Around 2.3m sq ft of new office development was completed across central London by the half-year point and is expected to increase significantly in Q3 to 5.5m, given the carry-over of delayed work from earlier this year and from 2022.
New developments will potentially increase availability in some notably affected submarkets, such as Midtown, Shoreditch and South Bank, where little to no prelets have been recorded on upcoming schemes.
Patrick Ryan, partner at Gerald Eve, said: “The disparity in the London office market between the stock grades is increasingly stark. Activity this quarter was underpinned by lettings in prime and grade-A space, and pr-lets made up a quarter of overall demand. However, landlords with the best stock should not rest on their laurels, as occupiers are becoming more cautious about their future growth plans.”
Investment market activity was quiet in Q2, with a total of £940m across 20 transactions. There were more individual deals than in Q1, but the average size fell from £102m to £46m. Consequently, the overall volume was down by nearly half compared with Q1 and was more than 60% below the five-year quarterly average.
Lloyd Davies, partner at Gerald Eve, said: “Investor sentiment has been selective but improved towards the end of Q2 as all parties got more comfortable on new pricing. There is still strong demand for core-plus and value-add assets, but the criteria have narrowed on quality, location and covenant. The shift towards lower lot sizes partly reflects the difficulty in raising debt, and we anticipate all-equity purchases, particularly for these smaller lot sizes, will be more common in H2 2023.”
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