Office market update Q2 2022
New hybrid model or edging back to prior status quo?
Discussions continue on whether demand will return to typical pre-Covid occupation patterns. Almost a year on from the return to the office post summer 2021 and how the hybrid office shake-out will land is maybe only a little clearer. London bus and tube journeys continue to tell us that journeys are around 75-85% of prior journeys dependent on transport type; this level of usage translates into a 3-to-4-day week. The bigger hurdle for London is the longer commute times for some workers – making it more difficult to persuade workers back into the office. Data tracked by Centre for Cities shows a lag in London’s recovery compared to key regional cities and commute times may well explain this. The other hurdle for London is the comparative cost, for occupiers like Charities, this has been an opportunity to significantly reduce their office footprint and cut costs.
It seems likely that some staff will prefer to work from home as much as possible over the summer, particularly given the unusually hot weather. With the burden of ever higher energy costs, winter may prove another reason to get workers back into the office rather than run up large bills at home.
Certainly, reports of the death of the office continue to look unfounded, although it is best-in-class buildings that are prospering whilst beyond that the picture is weaker and more mixed. Covid-19 uncovered stresses that already existed, and a hybrid model will prompt changes in what people expect from the office environment.
Vacancy rates holding firm in West End but uncertainty more apparent in other areas
Data from London suggests a complex pattern of a city in a state of flux. Economic uncertainty does not help and data shows that vacancy rates remain persistently above 8% since Q3 2021 for Central London as a whole. This is the level that the GLA has previously used as a trigger guide to review demand for space. Beneath this are varying patterns across submarkets – in the West End, the vacancy rate has not been increasing dramatically and sits just above 5%. The City and Docklands/Canary Wharf have seen more of an increase – vacancy rates in both these markets are now above 11%.
London leasing activity is quiet
Latest data suggests that take-up has been low in recent quarters, but this seems in part to be a function of some large deals in progress that have not been captured fully in data. While it is doubtful that take-up has yet reached pre-pandemic levels it is equally not languishing in the doldrums. There is activity, but the market remains quieter than long-term averages. Several large deals were agreed this quarter including Kirkland & Ellis’ pre-let at 40 Leadenhall, EC3, totalling 414,300 sq ft including option space for the tenant prior to the building’s 2023 completion.
Regional take-up also lacklustre
Overall Central London take-up over last 12 months is about 20% down on its 5-year average rate. Very similar rates are evident across regional cities with Birmingham -26%, Bristol -18% and Manchester -22%. Whilst the Commonwealth Games has helped shine a light on Birmingham, the office market is still quiet compared to past norms.
Regional vacancy rates continue upward trend
Although it is not precipitous, helped by the recent subdued rate of new build completions. Current vacancy rates vary between 8.6% in Manchester and 5.0% in Leeds. However, construction levels today are relatively high – more so for Bristol and Manchester – it seems reasonable to expect more pressure on rents soon. Similar to London, with the flight to quality still a key theme, it will likely be secondary assets where rents will suffer most.
Life sciences accelerate evolution
It is no surprise with the investment flowing into life science companies in the wake of the pandemic, that life science buildings have attracted the interest of investors, with further notable deals in both Cambridge and Reading this quarter. There continues to be a severe undersupply of lab space in Oxford and Cambridge, which is driving occupiers to adapt offices.
Investment volumes are down in Central London
which gives some sense of the growing uncertainty of the economic outlook but also some investors questioning what type of office will prosper in this new world order, alongside potential costs of bringing office space up to environmental standards. With the majority of buyers debt backed, the rising interest rates is significant, and pricing is now under pressure, more so since the quarter end.
Office: Q2 2022 | Central London | Key regional cities* |
|---|---|---|
| Current quarter (last quarter / 5yr ave) | Current quarter (last quarter / 5yr ave) | |
| Occupier | ||
| Availability rate % | 11.4% (11.0% / 9.4%) | 9.9% (9.5%, 8.8%) |
| Vacancy rate % | 8.7% (8.8% / 6.7%) | 6.6% (6.4%, 5.5%) |
| Qly take up (sqft) | 1.7m (1.9m / 2.5m) | 1.0m (1.1m, 1.7m) |
| Prime headline rent per sqft | £120 (West End) £75 (City) | – |
| Average rent per sqft | £57.80 (£57.90, £57.98) | £19.22 (£19.24, £18.29) |
| Rental growth (12-month rate) % | -0.8% (0.1%, -0.2%) | 0.7% (1.8%, 3.6%) |
| Supply | ||
| Completions (net delivered sqft) | 125,000 (0, 600,618) | 175,000 (244,000, 434,000) |
| Total under construction (million sqft) | 8.5m (7.2m, 8.0m) | 4.2m (4.0m, 4.4m) |
| Investment | ||
| Qly sales volume (£m) | £1,425m (£4.262m / £2,150 | £764.5m (£194m / £480m) |
| Average yield % | 3.3% (3.3%/3.7%) | – |
| Prime yield % | 3.25-3.5% (West End) 3.5%-3.75% (City) | 4.75% |
Office: key investment transactions
| Address | Town/ City | Building size (sqft) | Sale Price (£m) | Net Initial Yield | Buyer |
|---|---|---|---|---|---|
| London Wall Place | London | 193,760 | £302m | 3.98% | Kingboard (Hong Kong) |
| Capital Business Park | Cambridge | 260,000 | £160m | 2.5% | Oval Real Estate |
| 98 King Street | Manchester | 71,527 | £33.65m | 5.07% | Grosvenor Ltd |
| One Forbury Place | Reading | 185,109 | £100m | 5.65% | Citi Private Bank |