Office market update Q1 2022

Historically there has been a very strong link between employment growth and increased demand for office space.

Strength of the jobs market is a positive for offices

The employment market is one part of the economy that is weathering the current storm well. The latest service sector jobs numbers showed that service sector employment had returned to pre-covid levels. Historically the full impact of strong employment growth would have flowed through to office demand – it is more difficult to predict in the new hybrid work environment how much of that will translate into higher net absorption rates, but nonetheless strong jobs growth is a positive for the sector.

For now, take-up and net absorption trends remain weak across markets with no exceptions. Net absorption for key regional markets in 6 of the last 8 quarters has been negative and for central London 7 out of the last 8 quarters. Part of the reason for this may be that, although activity is evident in the market, companies are taking less space reflecting new hybrid work practices. Some parts of the occupier market are making more significant cutbacks on their office space requirements: charities and smaller organisations reducing their office space requirements by as much as 50%. With companies still feeling their way into the post-Covid hybrid work landscape there is a lack of urgency about occupiers’ decisions, even though focus on Grade A space remains strong.

Rental growth rates in the doldrums

It is not surprising therefore that rents are stable at best. Prime headline rents are being maintained in most markets as the focus on quality space persists.

Rental growth rates
 (% change p.a.)
ManchesterBirminghamBristolLeedsCentral London (all)West EndCity
Year to end Q1 20222.0%2.1%-0.7%2.3%-0.3%-1.1%+0.8%
Source: CoStar

A supply side safety valve in action?

In London in particular both completions and new construction are well off the peaks of earlier periods, which is probably not surprising in the face of uncertainty hanging over from the pandemic and now compounded by wider economic concerns. But another element – at least for London – are the markets safety valve operating as they should. In London, when vacancy tops 8%, and this is a level at which there would normally be downward pressure on rents.

ESG requirements are increasingly headlining in corporate decision making

For large corporates ESG is now a universally important component. For smaller companies, outside of Central London, who perhaps ordinarily couldn’t afford to put ESG ahead of other considerations due to cost, are happy to place a higher emphasis on ESG whilst higher levels of vacant stock permits it to be a cost effective choice.

Regional investment volumes

Despite weakness in the occupier market there is still activity in the investment market albeit still below long-term averages. Of the regional cities, Manchester is the strongest performer while Birmingham, Leeds and Bristol are lagging somewhat. Manchester investment volumes finished last year with very robust sales levels and whilst a lower Q1, activity in this market still dominated.

London investment volumes surprisingly strong

In Q1 there was £3.9bn invested in the Central London office market versus a 5-year average of £2.3bn. Given the current geopolitical environment it might well be that London continues to attract overseas investment as investors favour stability. Despite high levels of investment there was a slight uptick in Central London office yields, up by 40 basis points over the quarter to 3.3%.

Infrastructure key overall driver

Looking further ahead, there are signs that belief in the arrival of HS2 are beginning to crystallise, which is likely to encourage investors to think differently about some regional markets as transport access opens up. In line with this thinking Mayfair Capital announced an office investment in Solihull this quarter at Trinity Park. The new HS2 Interchange station, Arden Cross, will be situated under a mile from the office once complete providing a very fast travel time into London.

Office: Q1 2022Central LondonKey regional cities*
 Current quarter
(last quarter / 5yr ave)
Current quarter
(last quarter / 5yr ave)
Occupier   
Availability rate %11.2%
(11.2% / 9.3%)
9.6%
(9.4%, 9.0%)
Vacancy rate %8.7%
(8.4% / 6.6%)
6.1%
(5.8%, 5.4%)
Qly take up (sqft)1.8m
(2.8m / 2.7m)
 0.80m
(1.3m, 1.7m)
Prime headline rent per sqft£120 (West End)
£75 (City)
Average rent per sqft£57
(£57, £57.60)
£19
(£19, £17.80)
Rental growth (12-month rate) %-0.3%
(-1.1%, -0.0%)
1.3%
(2.4%, 3.9%)
Supply  
Completions
(net delivered sqft)
 0sq ft
(875,000, 676,000)
245,000sq ft
(300,000, 424,000)
Total under construction
(million sqft)
7.1m
(7.1m, 8.2m)
4.5m
(4.7m, 4.5m)
Investment  
Qly sales volume (£m) £3,894m
(£2,367m / £2,297m) 
 £196m
(£850m / £504m)
Average yield %3.3%
(2.9%/3.6%)
Prime yield %3.25-3.5% (West End)
3.75% (City)
4.75 – 5.25%
Source: Cluttons, CoStar, MSCI, * Key regional cities: Birmingham, Bristol, Manchester, Leeds

Office: Key investment transactions

AddressTown/ CityBuilding size
(sqft)
Sale Price (£m)Net Initial YieldBuyer
Fleet PlaceLondon130,000£191m4%Manhattan Garments
White Rose Office ParkLeeds470,000£110m6.75%Immobel
Colmore PlazaBirmingham310,000£182m4.6%Blackstone
BroadgateLondon (EC2)710,000£1,210m3.7%NPS of Korea
Ryder CourtLondon (SW1)71,000£132m4.5%M&G Real Estate
Source: Cluttons, CoStar, Propertydata

The hybrid working recalibration yet to settle

The outlook now for the office market is even more challenging, alongside covid induced changes in work practices, the office market now needs to navigate through toughening economic conditions – which whilst directly impacting other parts of the commercial real estate market more directly – will have consequences for the office market. There will continue to be a strong focus on best-in-class assets.

Office market update Q1 2022

  1. Read the Q1 2022 commercial market update here
  2. Read more about the industrial sector here
  3. Read more about the retail sector here
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Sophy Moffat

Head of research

T +44 (0) 20 7647 7032