UK office market review Q4 2020

UK office market more resilient than expected with declines in values less severe than commentators had predicted.

The resilience of the UK office market appears to have been underestimated with values declining less than initially expected, but Lockdown 3.0 is likely to result in further economic damage and the end of the furlough scheme could negatively impact the office-based employment.

This office market monitor focuses on central London and the ‘Big 6’ regional centres of Bristol, Birmingham, Leeds, Manchester, Glasgow and Edinburgh.

Key findings

• Take-up across all the UK’s major office centres has been on a declining trend since the end of 2018. Not surprisingly, this trend continued through 2020 as the UK endured a national lockdown on three separate occasions. Take-up in central London was the lowest in any year since at least 2003.
• Availability has increased in 2020 across all central London submarkets with the single exception of Docklands. The availability rate in the City has reached 14%. It is also creeping up in the Big 6 regional centres. Glasgow and Birmingham have availability rates of 14% while there are tighter market conditions in Edinburgh where the availability rate is 8%.
• Development pipelines show above average levels of construction in both central London and the Big 6 regional centres. Almost 70% of the space due to be completed in the next two years has been pre-let. In the context of working from home, also known as telecommuting, occupiers may require less space. But the requirement is likely to be for the highest quality, most flexible space which enables a degree of social distancing.
• Rental growth has been limited across all centres rental growth is now non-existent. Above average levels of new construction will exert downward pressure on overall rents if demand measured by take-up continues to decline. Demand for Grade A space may support rental levels for the best space but rents in more secondary space will start to come under pressure.
• Office investment markets had limited liquidity in Q2 and Q3 but rebounded strongly in Q4. Given the strong positive correlation between the performance of UK commercial real estate and the economy, it may be surprising that the fall out so far from the pandemic and associated lockdown has been so limited. Real estate investment markets, however, are being driven by a search for yield in the current hyper-low interest rate environment.

The lack of any deal with the EU involving financial services will continue to be a long-term threat to central London office markets. This year we expect rents and capital values to continue to drift. Income return will drive performance and Big 6 regional offices may well outperform central London offices.