Office market update Q4 2021

Large year-end London office deals show confidence in the outlook, but TfL passenger volumes took another hit from Omicron in December.

Tech and media grab the headlines

2021 ended in spectacular fashion with Google’s purchase of the entire Central St Giles estate in London, totalling more than 700,000 sq ft, for £762.5m. Google securing its office space for the long term is only the most recent move by a string of tech firms leasing large amounts of space; this includes Facebook, Apple, Tiktok and Snapchat, as well as established media companies such as ITV. Interest in the media sectors is not limited to the techcos themselves—another of the largest investment deals in Q4 was Land Securities’ acquisition of a 75% stake in MediaCity in Salford.

Another noteworthy deal at the tail end of 2021 was the Goldman Sachs purchase of a 75% stake in Edge’s £500m London Bridge office. This, alongside the Google deal, is a strong statement of confidence in the outlook for London.

Take up still lagging overall

Q4 saw 2.1m sq ft of take up in Central London and, although it has edged up from its 2020 Q3 nadir, it is still well below both the 2018 Q3 peak and the 5 year quarterly average of 2.8m sq ft (a figure that itself is pulled down by the 2020 trough).

Positively, net absorption in London moved out of negative territory for the first time since 2019 in Q4 2021.

Figure 1. Central London office net absorption, m sq ft

Source: Cluttons analysis of Costar data

For the key regional office markets the story was very similar to that of the capital; 1.1 million sq ft of office space was leased in Q4, close to 40% below the 5-year average, and net absorption remained negative. The key question for 2022 is how long any covid hangover lasts, and whether things will return to the prior status quo.

Demand slowly edges up

In Q3 we looked at the impact of the pandemic on journey numbers and it seemed a slow but steady recovery was underway. Omicron put a stop to that and placed it in a slightly longer context; it is clear that, by year-end, public transport journeys in London still had a long way to go to return to pre-pandemic levels. It appears, however, that 2022 has got off to a surprisingly good start, with public transport usage improving once more.

Figure 2. TfL passenger volumes, millions

Source: Transport for London

Cambridge-Milton Keynes-Oxford Arc

There remains strong interest in the Cambridge-Milton Keynes-Oxford Arc, exemplified by Royal London Mutual paying over £60m for 2600 Oxford Business Park, well above the asking price, with the buyer stating that The Oxford and Cambridge Arc continues to be a key investment focus. Funds are especially keen to acquire life science assets.

Flight to quality continues

One of the most discussed topics is how companies will revise their office space requirements, what the future of the office looks like and what form it will take. A confluence of pressures drives this; staff are seeking a better workplace experience; companies are revaluating how to best retain their workforce (including wellness); employers are looking to drive the best efficiencies from office space (collaboration); and there is a much stronger focus on ESG credentials and potential associated costs. This means the occupier and investment markets alike are seeing a strong flight to quality.

This flight to quality is clearly seen in the London investment market, where Central London yields have been driven down to <3% according to MSCI. The rest of London averaged 4.4% in Q4, creating a gap between the two that has not been seen for several years. This is something which should be no surprise given the overall superior quality of stock in Central London.

Figure 3. London office yields, %

Source: MSCI

The rest of the UK is also seeing investors look for quality, even though lower overall stock levels make it much harder to find suitable investment opportunities. While this is not a new trend, it has intensified recently.

Table 1: Headline market data Q4 2021