With PIB Group on track for a potential new record rent in the City, at around £130 per sq ft, just a couple of months after Brazilian bank Banco Master posted its own record at £122 per sq ft, rents are set to continue rising – but how much further will they go?
The root of the trend lies in two important factors which are combining to increase the pressure on the City’s leasing market and push rents to new heights.
First, there is strong demand, with around 11m sq ft of active searches ongoing at the end of the last quarter, according to Knight Frank’s London Series report. It found that prime availability in the City is at 1.5% – lower than the wider London average of 2.6%, as well as the wider West End, which comes in at 2.5%.
And appetite remains particularly strong for prime space in particular, with take-up of such space accounting for 65% of the total last year, whereas the average for the previous five years was 45%.
Yet there is especially strong appetite for tower space, such as AXA IM Alts’ 62-storey 22 Bishopsgate, EC2, where Banco Master set its record, or Brookfields Properties’ 37-storey One Leadenhall, EC3, where PIB Group could set its own.
Michael Wiseman, head of office leasing at British Land, which recently secured funding for its tower development at 2 Finsbury Avenue, EC2, said: “We forecast this growth in-house. But I think if you plotted what’s happened against our in-house graph, the line would be way above. We were confident it was happening but it’s happening quicker than we thought.”
He pointed to deals such as PIB’s potential lease at One Leadenhall, which he described as a bellwether of the demand for that top-end tower space: “It was under offer twice before these guys [first to Quadrature and then to TD Bank]… in terms of depth of demand, people are willing to pay the rents. Getting one or two outliers is one thing, but when you’re seeing consistent deals being done at these high levels that’s what gives you the opportunity to really push rents.”
A crunchy market
There is simultaneously a supply crunch widening the gap between the amount of space being delivered and taken up, exacerbating the already fierce competition for space by narrowing the number of options being fought over.
While in 2019 the discrepancy between the annual take-up of better-quality space and the level of completions was 500,000 sq ft, by the end of last year this had already risen to 2.4m sq ft, according to Knight Frank’s report. With just 7.6m of the speculative 11.9m sq ft across London under construction falling into the “prime” category, it predicts the shortfall could rise to almost 8m sq ft by 2028.
Shaun Dawson, head of insights at occupier agency specialist Devono, said: “Prime office rents in the City have soared over the past five years, with top-tier grade-A spaces seeing a remarkable 36% jump since 2019, reaching £95 per sq ft.
“However, even this impressive growth has been outpaced by rents in new towers, where prices for the upper floors have surged by 43%, hitting £125 per sq ft.”
He adds: “While the rapid growth in 2024 is unlikely to continue at the same pace in the first half of 2025, the second half is expected to see some renewed momentum. As new developments near completion, they are predicted to push rents even higher. By year-end, there is the potential for prime grade-A rents to hit £100 per sq ft, while tower spaces are set to edge closer to the £150 per sq ft mark.”
Towering conviction
Josh Lamb, a director in Savills’ central London leasing team, agreed: “Looking at our existing data, I would be confident that the next generation of tower space could exceed £150 per sq ft.”
As a result, developers looking to convince investors to take risks amid high interest rates and inflated construction costs will have a positive argument to make as rents increase the viability of future schemes.
Rob Samuel, head of UK development for AXA IM Alts said: “The well-publicised shortage of strategically located, amenity-rich office space in London will likely become more pronounced in the coming years as occupier requirements have the potential to exceed future supply.
“This dynamic presents a compelling opportunity for investors such as ourselves who have a high conviction in the sector, a proven track record, and the expertise and future pipeline to execute on this conviction.”
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