The South East office market is on course for its strongest half-year since the second half of 2021. This comes after its strongest Q1 for three years provided some consolation following a period in which the submarket saw a net contraction of nearly 800,000 sq ft.
Q1 activity in the South East hit a three-year high of 1.1m sq ft and, according to research by agents Lambert Smith Hampton (LSH), the region is expected to see an additional 900,000 sq ft of take-up before the end of Q2.
This would be 9% above the long-term average and its strongest performance since H2 2021, which LSH attributed to a resurgence of larger transactions above 20,000 sq ft – 14 of which closed in Q1, compared with just six in Q4 2024.
Demand continues to be strong, with active requirements across the region hitting 2.3m sq ft after a rise in interest from larger corporate requirements over 30,000 sq ft, according to LSH’s report
It also predicted that supply, at a 13-year high, is close to peaking, since more than four-fifths of the speculative development under construction at the end of Q1 was concentrated in Oxford and Cambridge.
Construction activity is extremely limited elsewhere, with 18 of the region’s 25 submarkets having no speculative development underway.
Available prime supply is similarly unevenly distributed – of the 30,000 sq ft options which could interest those larger corporate occupiers, 63% are concentrated in just five markets: Hammersmith & Chiswick, Reading, Slough, Oxford and Cambridge.
A rise in change-of-use activity has added further pressure by removing around 4m sq ft of office floorspace from the region’s stock between Q1 2024 and Q1 2025.
As a result, occupiers are willing to pay more for the best space.
Average prime rents have risen by an average of a quarter, with standout performers including One Station Hill in Reading, up by 45% to £56 per sq ft, and the PLANT in Basingstoke, up by 36% to £38 per sq ft.
The report offers cause for optimism after a bruising period of office consolidation in the region.
Cushman & Wakefield’s National Office Moves report found that, out of the big five regional cities and the South East, the latter was the only to experience a significant net loss of 793,000 sq ft in 2024.
While the largest five transactions of the year occurred in the region, these together produced a net contraction of 530,600 sq ft.
It was also the only region where the number of contraction deals outnumbered the expansions, making up 54% of activity.
Therefore, while LSH’s report notes that office values have undergone a severe correction, they say stability is returning and the current market offers opportunities for the shrewd investor.
Andrew Hodgkinson, senior director at LSH, said: “Something of a perfect storm is occurring – occupier demand is improving, but this comes with a critical lack of prime options and a thin pipeline to boot. What this creates is fresh opportunity for those brave enough to capitalise on this shortfall – especially in aspirational locations with infrastructure and affordability advantages but a lack of prime supply, like Maidenhead, Milton Keynes and Guildford.”
Q1 saw 35 transactions, which is the highest since Q4 2021 and significantly higher than the five-year average of 28. But volume was at just £259m in Q1, down sharply from £578m in Q4 2024 and the third lowest quarterly out-turn for the past five years.
Prime yields are holding steady, with levels for in-town assets reflecting a 15-year income plateauing around 6.5%. LSH also found that the secondary market is bottoming out, with notional yields at c.12.75% after softening by around 50bps over the year to Q1.
Charlie Lake, executive director and national head of office investment at LSH, said: “Strong rental growth, together with a limited choice of best-in-class product, is creating an unprecedented window of opportunity in the value-add space.”
He added: “With an increasing depth of core buyers returning to the sector, there is an opportunity to move fast and exploit the development lag we are in– especially since falling interest rates and improving finance costs could contribute towards a degree of yield compression in the second half of the year.”
Image © Robert-Judges-REX-Shutterstock
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