City Office Market Watch

Rents hold strong in Q1, with Serviced Office Providers showing no signs of slowing down

While the lack of a decision surrounding Brexit may cause a drag on the investment market in London, the occupational market continues to outperform expectation. Occupiers have seemingly come to terms with the long drawn-out nature of the Brexit negotiations, and continue to commit to office space in the capital, in particular for smaller deals. There were 33 occupational deals in March alone, bringing the total for the year to date to 100, which is up on this point last year by eight deals, and the 10-year average by five. This is also joint fourth most deals in the first quarter in the last 20 years.

Take-up for March reached 637,850 sq ft, resulting in the total for the year reaching 1.16m sq ft, which is down on this point last year by 20%, and down on the 10-year average for the first quarter by 12%. This brings the 12-month rolling total to 7.3m sq ft, which is actually up on the five-year average by 0.2%. Therefore, while we are still seeing a steady churn of deals, they are generally within the smaller sub 10,000 sq ft size-bracket, resulting in the average deal size for Q1 being just 11,447 sq ft, compared with 15,760 sq ft at this point last year.

Graph 1

GRAPH 1 | City take-up Q1 2019
Source: Savills Research

The largest deal to complete in March saw international law firm Milbank LLP pre-let levels 8 and 9 (68,275 sq ft) at the British Land/GIC future new development 100 Liverpool Street, EC2. They are scheduled to move in to their new office in early 2021, moving from their current offices in 10 Gresham Street, EC2 and 125 Wood Street, EC2. They will be joined by UK independent corporate broking/advisory house Peel Hunt LLP, who also committed to pre-letting part of the 7th floor (40,000 sq ft) in March this year. The scheme is now 60% pre-let, with just 174,000 sq ft remaining.

Also in March, we saw three deals from Serviced Office Provider WeWork, who continue their rapid expansion across central London. They acquired levels 4, 8, 9, & 10 at 2 Minster Court, EC3 (50,091 sq ft at £61.50/sq ft), the whole of 12 Moorgate, EC2 (35,000 sq ft), and levels 2 - 6 at Dixon House, 1 Lloyd’s Avenue, EC3 (32,133 sq ft).

Following these deals, at the end of Q1, the Serviced Office Provider sector has actually accounted for the greatest proportion of City office take-up at 20%, followed by the Insurance & Financial Services sector at 18%. There has been a fairly slow start to the year from the Tech & Media sector who have only accounted for 10% of take-up.

Total City supply at the end of March stood at 6.7m sq ft, rising by 1.1% on the end of last month and equating to a vacancy rate of 5.2%, which is down on March 2018 by 70 bps, and down on the long-term average by 140 bps.

The low supply coupled with the continued stronger than expected demand, has resulted in City rents maintaining their previous levels, and even rising in some instances. At the end of Q1, the average prime rent is £78.60/sq ft, compared with £79.79/sq ft for this point last year, but up on Q4 2018 figure of £76.85/sq ft. The average Grade A rent for the first quarter settled at £64.12/sq ft, which is up on this point last year by 3.7% (£61.84/sq ft), and Q4 2018 by 1.7% (£63.06/sq ft). While it is very encouraging to see these high averages for the first quarter, we must remember that they are averages from a relatively small data set. As the year progresses, and the sample data size increases, we believe it is likely these rents will start to reduce slightly.

Graph 2

GRAPH 2 | City rents
Source: Savills Research

Analysis close up

Table 1

TABLE 1 | Monthly take-up
Source: Savills Research

Table 2

TABLE 2 | Supply
Source: Savills Research
Completions due in the next six months are included in the supply figures

Table 3

TABLE 3 | Year-to-date take-up
Source: Savills Research

Table 4

TABLE 4 | Development pipeline
Source: Savills Research

Table 5

TABLE 5 | Rents
Source: Savills Research
*Average prime rents for preceding three months
** Average rent free on leases of 10 years with no breaks for preceding three months
N.B. We have amended our historic stock figures, resulting in a slight change of our historic vacancy rates (Aug 2015)

Table 6

TABLE 6 | Demand & Under Offers
Source: Savills Research
Demand figures include central London requirements

Table 7

TABLE 7 | Significant March transactions
Source: Savills Research

Table 8

TABLE 8 | Significant supply
Source: Savills Research