Available grade-A office space in the capital is at its lowest level since Q4 2010 at just 41% of total supply (10.72m sq ft), according to research from Cushman & Wakefield.
The real estate services firm found office requirements for new space, predominantly grade-A, have rocketed over the last quarter to over 11m sq ft, its highest level since March 2014. Demand is largely for space in the 20,000 to 50,000 sq ft bracket (40%) and from occupiers in the banking and financial services and media and technology sectors.
Cushman & Wakefield head of London office leasing Andy Tyler said: “Assuming consistency of demand, we would expect further rental increases for quality grade-A space in London by the end of the year.”
The firm predicted that the discrepancy between premium office supply and demand may be further compounded by the pressures of rising build costs and interest rates. With 9.24m sq ft of approved office developments yet to be constructed in London, it noted that developers may begin questioning the viability of the pipeline, which is key in determining future supply and demand dynamics and rental performance.
The lack of available space is specific to grade-A office supply, as overall supply levels have increased by 6% in Q3 2022 to 25m sq ft. This puts vacancy levels at 8.8%, the highest level since 2004. This, according to Cushman & Wakefield, has been driven by an 11% rise in the volume of second-hand space (now totalling 14.8m sq ft).
Yet, the Central London leasing market had remained resilient, with 7.65m sq ft of leasing activity so far this year, 9% above the five-year Q1-Q3 average. The most recent quarter saw 2.46m sq ft in transactions, 3% above the five-year Q1-Q3 average, a drive led by the professional services, media and technology, and banking and finance sectors. Each sector accounted for 24%, 21% and 20% of take-up in Q3 respectively.
Examples include law firm Addleshaw Goddard taking over 110,000 sq ft at 41 Lothbury, EC2, and Citibank taking over 94,000 sq ft at 40 Bank Street, E14.
“Occupiers’ priorities when it come to their office space have clearly pivoted away from quantity and towards quality and performance,” said Tyler. “This is taking several forms but ESG credentials, greater appeal to talent and culture retention are topping the list and only the best quality space can offer that.
“Competition is fierce, especially now firms have a clearer picture of what their future of work might look like, post-pandemic, and we are seeing more and more take action. Those looking for secondary space have plenty of options available to them, but I foresee a lot of stock requiring redevelopment or complete repositioning.”
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