Office market update Q3 2022
The central theme in this sector is the flight to quality by investors and occupiers alike.
The flight to quality remains a core theme. The top end of the occupier market in Central London continues to perform well – as evidenced by LandSec’s successful letting of its Nova scheme in Victoria at £80-90 psf. There is a dichotomy in the market however, with an unusually wide divergence between best-in-class and poorer stock. Whilst net absorption in Central London is positive, it is prime buildings exerting a positive force on the data.
Occupier trends in key regional cities match London. The same split between the top and bottom of the market by building quality is also evident across key regional cities, although it is perhaps less extreme. Google Mobility data shows that it has been easier to tempt employees back to the office in these smaller cities compared to London where both commute time and congestion have an impact. Nevertheless, each of the key regional cities has a vacancy rate above its 5-year average (albeit in Leeds only marginally so).
More quality, less quantity. Office budgets are changing, with corporates wanting the best space, but with a reduced footprint. Countering this is the commitment to more space per employee, with a real sense that staff are much less happy with tight space constrictions than pre-covid. How these tensions play out over the longer term it is likely to be the key to resolving the shape of the hybrid work model going forward.
Limited investment activity. Regional office yields have more of a margin over the bond yield than Central London offices but both are likely to suffer a re-pricing as investors adapt to the new interest rate environment. Prime yields for both have already shifted outwards. Investment volumes had already been trending lower with occasional large deals somewhat masking this downward trend, so too deals that were agreed much earlier in the year but have only just appeared as completed in more recent data.
By far the largest recent sale was the £809m purchase of 21 Moorfields by LendLease at a yield of 4.6% – indeed this scale of deal only comes along once or twice a year and notably all of these big deals since 2014 have been by overseas purchasers. But even the Moorfields deal was at a 9% discount to its previous valuation, putting paid to thoughts of a £1bn sale being expressed earlier in the year. The failure of the sale of the Bank of America HQ at King Edward Street, after Norges Bank, did not attract the bids it hoped for, was perhaps a harbinger of things to come.
|Property||Price £m||Yield %||Date||Purchaser|
|Moorfields, 21||£809||4.6%||2022||TCorp (Australia)|
|Lime Street, 52-54||£718||3.98%||2922||Ho Bee Land Ltd|
|Canada Square, 25||£1,075||4.23%||2019||Citigroup|
|Battersea Power Station||£1,583||–||2018||Permodalan Nasional Bhd|
|Plumtree Court, Shoe Lane||£1,165||4.1%||2018||NPS of Korea|
|Broadgate, 5||£1,000||3.95%||2018||CK Asset Holdings Ltd|
|Fenchurch Street, 20||£1,282||3.46%||2017||LKK Health Products Group|
|Leadenhall Street, 122||£1,150||3.42%||2017||C C Land|
|Canada Square, 8-16||£1,175||4.65%||2014||QIA|
|St Mary Axe, 30||£726||3.75%||2014||Safra Group (Brazil)|
|Upper Bank Street, 10||£795||5.5%||2014||China Life Insurance Co|
|Office: Q3 2022||Central London||Key regional cities*|
(last quarter / 5yr ave)
(last quarter / 5yr ave)
|Availability rate %||11.2%|
(11.4% / 9.4%)
|Vacancy rate %||8.6%|
(8.5% / 6.6%)
|Qly take-up (sqft)||2.3m|
(2.0m / 2.6m)
|Prime headline rent per sqft (best in class)||£120 (West End)|
|Average rent per sqft||£59.30|
|Rental growth (12-month rate) %||-0.3%|
(gross delivered sqft)
|Total under construction|
|Qly sales volume (£m)|| £1,642m|
(£1,585m / £2,164m)
(£796m / £497m)
|Average yield %||3.1%|
|Prime yield %||3.5% West End|
(Last qtr 3.25-3.5%)
4.0%-4.25% City (Last qtr 3.5%-3.75%)
|5.0% (Last qtr 4.75%)|
Office: key investment transactions
|Address||Town/ City||Building size|
|Sale Price (£m)||Net Initial Yield||Buyer|
|21 Moorfields||London||568,500sqft||£809m||4.6%||TCorp (Australia)|
|Lindsey Street||London||88,850 sqft||£158.5m||4.5%||Chinachem|
|First Street North||Manchester||130,900 sqft||£105m||–||Pension Insurance Corp|
|Equinor House||Aberdeen||45,797 sqft||£20m||7.7%||Overseas investor|