The banking and finance sector has accelerated an uptick in London office leasing activity in Q3, after a shaky start to the year.
The sector was the most active occupier segment and accounted for more than a fifth of all leasing activity following strong preletting on deals of more than 20,000 sq ft, according to research by Gerald Eve.
Office take-up increased to 2.9m sq ft, more than 30% higher than Q2 and 5% above the five-year quarterly average. The majority of these transactions were for best-in-class, EPC-compliant space that will meet incoming regulations by 2030, and preletting accounted for nearly a fifth of the total.
Serviced office take-up remained steady and recorded two consecutive quarters of take-up in excess of 100,000 sq ft for the first time since 2019. However, ongoing discussions in the sector amid WeWork’s lease renegotiations may provide new opportunities for the sector as other operators look to take on ex-WeWork locations.
Overall availability remained unchanged at 9.1% as a result of a flurry of refurbishments and new developments hitting the market – 3.7m sq ft of new office developments have been completed in central London this year.
At the same time, delayed completions have led to around 1m sq ft of schemes that were due to complete in Q3 being delayed until Q4, and around 500,000 sq ft that was meant to be finished in Q4 being pushed into Q1 2024. The agency warned that this may lead to further delays in speculative developments owing to increased financing margins.
The pipeline up to 2025 looks set to fuel significant supply increases, Gerald Eve predicted, with an estimated 6.2m sq ft of new development under construction and a further 4.4m sq ft being refurbished.
This plus the potential for an additional 3.3m sq ft of WeWork-owned space to hit the market may lead to an influx of second-hand space in submarkets including the City, the South Bank and Canary Wharf, where the flex giant has a strong presence.
Rents remained resilient at the top end of the market, where supply is restricted in locations such as Mayfair/St James’s and the City, which were the only areas to record an increase in grade-A rents in the quarter. Respectively, rents increased by £10 per sq ft to £150 per sq ft and by £2.50 per sq ft to £77.50 per sq ft.
Rhodri Phillips, a partner at Gerald Eve, said: “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.”
He added: “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%.”
However, the office market has not managed to escape the ongoing impact of the struggles facing capital markets, including economic uncertainty and cautious sentiment, with office yields in 2023 having moved out more than any other major property sector. As a result, the central London offices annual total return was -14% in September.
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