Central London Office market show green shoots of recovery in Q1
The first quarter of 2021 halted five consecutive quarters of decline in the London office market, with activity in the occupier market rebounding significantly to stand at 1.3 million sq ft, following a robust March.
Marking a 46 per cent increase on Q4 2020, these figures were boosted by the return of large deals, such as Latham & Watkins taking 200,000 sq ft at One Leadenhall, EC3, and TikTok acquiring 86,000 sq ft at Kaleidoscope, EC1.
While take-up was 46 per cent below the 10-year quarterly average, over half of all activity took place in March which points to an upwards trajectory in the coming months.
Large deals drove this increase, with 16 deals over 20,000 sq ft accounting for 62 per cent of quarterly take-up in Central London.
As in Q4 2020, financial services was the most active tenant sector, comprising 26 per cent of quarterly take-up. Again, this was followed by the professional services and then TMT & creative sectors, which accounted for 23 per cent and 16 per cent respectively.
Availability rose for the fifth consecutive quarter, to 21.7 million sq ft - a 23 per cent rise on Q4 and a 69 per cent increase year-on-year. The central London vacancy rate has subsequently risen from 6.1 per cent to 7.5 per cent, now two percentage points above the 10-year average.
There is now 12.9 million sq ft under construction, with 5.1million sq ft due to complete during 2021. Of the total development pipeline, 33 per cent is already pre-let, leaving 8.7 million sq ft of available space.
There were only seven developments that completed over the quarter, totalling 465,000 sq ft. This was much lower than the 2.3 million sq ft that completed in Q4 2020 and the 1.8 million sq ft in Q3 2020.
A record City of London office rent was set at the start of Q1, when Ukrainian energy giant Dtek agreed to pay nearly GBP110 per sq ft for the top floor of the Leadenhall Building.
Alasdair Gurry, Director, City Office Agency, Avison Young, says: “Encouraged by the smooth vaccine rollout and relaxation of lockdown restrictions, there is an increasing sense of positivity in the London office market, reflected in the highest take-up total since 2020 Q1. Buoyed by increased levels of office occupancy and the shift in appetite to return to the office, we are likely to see rapid increases in market activity in the months ahead. In contrast to the prevailing view a year ago of the ‘death of the office’, this provides yet more cause for optimism in the long-term future of the Central London office market as it begins its recovery.”
Hampered by lockdown restrictions, London’s office investment market experienced a quiet first quarter of the year, with investment volumes totalling GBP2.2 billion. While this is 43 per cent below the ten-year quarterly average of GBP3.5 billion (and the GBP3.6 billion seen in Q4 2020), this is still roughly double the figure for Q3 2020 and close to triple the total for Q2 2020. The impact of lockdown restrictions was felt most at the upper end of the market, given that Q1 saw relative liquidity, with the 42 deals transacted the highest since Q4 2019.
While traditionally quiet, January saw GBP518 million transactions – more than in the first month of 2020 or 2019. Activity gained steady momentum over the next two months with GBP733 million worth of deals in February and GBP759 million in March.
The number of deals increased for the third consecutive quarter, with 42 transactions over the whole of Q1 2021. While this is the highest amount since Q4 2019, it is still 25 per cent below the 10-year average.
There were six deals worth GBP100 million or more; the highest value of which was CBRE GI’s acquisition of Atlantic House, EC4 for GBP265 million in February. This was followed by Wing Tai Properties Ltd’s purchase of Athene Place, EC4 for GBP255 million in March. These buildings were the only over 100,000 sq ft that transacted in Q1.
As in Q4 2020, the West End attracted the majority of Q1 activity with 18 deals worth GBP812 million transacting - 40.4 per cent of the total seen over the quarter. Midtown was the next most active submarket with GBP754 million worth of deals, followed by GBP210 million in the City and GBP118 million in the Tech Belt.
Some 69 per cent of investment came from overseas investors, down from 89 per cent in Q4 2020.
Prime yields remained relatively stable across Central London – these are 3.5 per cent in the West End and 4 per cent in the City.
Chris Gore, Principal, Central London Investment, Avison Young, says: "Considering that we were under lockdown for the entire period, it is no surprise that the first quarter of the year was relatively quiet. With investors still impeded by the luxury of actually being able to inspect a building, there was relatively little supply released to the market. Nonetheless, we continue to see investment for well-located, well-let buildings, such as CBRE GI’s purchase of Atlantic House from Deka Immobilien for GBP265 million, which was the largest deal of the quarter.
“We anticipate activity to increase across the coming months, driven by an improvement in occupier fundamentals and investor sentiment. In fact, we are already starting to see an uptick in new investment sales being launched to the market and we expect this to continue throughout the year. However, with travel restrictions likely to continue through late spring and summer, this gives domestic investors or those international investors with a London office an advantage. This was evidenced in Q1, as domestic investors made up an increased proportion of total volumes, with European investors also particularly active.”