The London office rental market is in full recovery mode this year with. Office occupancy stands at 74% for traditional office spaces and 82% for flexible workspaces. The London office rental market now has the highest number of office letting since the pandemic began. A trend has emerged suggesting that the demand for small and medium sized lettings is driving growth.
A significant demand trigger has been for offices that are smaller in nature. Lettings between 10,000 and 20,000 topped the leaderboard of letting demand. In total these letting accounted for 23% of total activity in the market with 713,000 sq ft of deals coming to completion.
In a post Covid world staff retention is at the forefront and seems to be a deciding factor. Tenants are now prioritizing offices with more sustainable buildings and add-on amenities for staff. Whilst office price used to rule, it is now becoming more secondary relative to other business demands , notably staff satisfaction.
Availability of offices continues to decline reflecting the resurgent health of the rental market. The last two quarters of above average demand sees availability now stand at 8.1%, down from 8.7% prior. With market fundamentals now stable again, it’s expected that the incentives offered throughout the pandemic will continue to fall away. Terms are already tightening as landlords are able to better name terms in a market of improved demand and sentiment.
The cost of construction is forecast to increase 5% in 2022. The increase in input cost as well as scarcity of building materials could pose a threat to completion of new schemes in the latter half of 2022. Irrespective a total of 7.3 million sq ft is expected to complete this year with a total of 33% already let.
Resolute investment in the London office market depicts a rosy picture of the future. Investment in Q1 saw a 13% increase relative to Q4 2021. This totalled £3.5bn of investment which is 17% above the 5 year average investment trend. A significant proportion of this demand is from overseas investors who have resurfaced given reduced travel restrictions post Covid. Investments in the first quarter were dominated by large scale purchases, 86% of all investments made were lot sizes of £100+ million.
Energy Efficiency Pressures & Re-use at the Forefront of Recovery
Deloitte anticipates a record surge in office starts for the remainder of this year. Predominantly driven by a backlog of demand and improvement in the energy efficiency of buildings. According to the study by Deloitte, 2.7 million sq ft of planned office buildings are in the demolition phase. It’s expected that live construction will start before the end of September.
This is indicative of the already existing trend of declining new builds. Refurbishments of properties to absorb increased office rental demand is being encouraged as environmental standards pressure continues to mount.
One of the more anticipated developments is the renovation of BT’s prior head office, the 729,000 sq ft 81 Newgate Street near St Paul’s Cathedral. The retrofit is scheduled to be completed in 2025 with sustainability at the forefront of the design process.
Mike Cracknell, director in real estate at Deloitte, declared: “Increased new starts – especially of refurbishments – reflects anticipated renewal of existing stock to provide sustainable and quality space now strongly demanded by occupiers.”
He feels that the long term health of the office market will remain strong as existing property owners and developers have an enhanced appetite to upgrade their building’s energy performances.
He maintained that delays in completions driven by supply chain disruptions and labour shortages have contributed to a lag in completed developments. Despite this he asserts that demand has remained strong in London and that investment numbers remain encouraging.
The lag in development is affirmed by developers with two thirds asserting they intend to add to their pipeline in the second half of the year. With a large focus on energy efficiency , the new ‘Minimum Energy Efficiency’ legislation that is currently passing through parliament is expected to apply even more pressure on developers and property owners to upgrade their buildings’ energy standards.
A survey has shown that 80% of London stock will need to be upgraded, which amounts to up to 15 million sq foot of property. The huge costs associated with new builds as well as poor pressure to increase energy efficiency of existing builds has set a clear preference for renovation and re-use.