Central London Office Analysis shows a number of large occupiers are continuing to commit to London despite subdued activity levels

Take-up across Central London fell to 1.0 million sq ft in Q3 2020, 7% below the previous quarter and 59% below the 10-year average.

The largest deal of the quarter was to law firm Baker & McKenzie, which signed for 153,000 sq ft at DUO, 280 Bishopsgate, EC2, followed by Netflix trebling its office space in London by taking 87,000 sq ft at the Copyright Building, 30 Berners Street, W1.

July was the strongest month, recording 45% of the quarter’s take-up. This was followed by a weak August that only accounted for 18%, before activity picked up again in September.

Activity during the quarter was driven by a diverse range of occupiers. Professional services accounted for 30% take-up, followed by the TMT & Creative and Government & Services sectors, which made up 16% of activity each.

The pandemic has affected existing requirements but also raised questions for most businesses regarding the long-term future of how much office space they require. A number of companies have made commitments to getting workers back into the office, providing an array of incentives to encourage a return, and there are signs of some confidence in the market, such as The Office Group signing a 20 year lease for the entire building at 210 Euston Road, NW1.

The rental market remains relatively resilient, with headline rents holding up in the vast majority of submarkets. Prime headline rents are currently £72.50 per sq ft in the City, £115 per sq ft in the West End and £45.00 per sq ft in East London. Nevertheless, there is still uncertainty as the market recalibrates to unfolding events. If there is a fall in rents due to reduced demand, it is expected that they will recover quickly due to such limited supply and a diminishing development pipeline. What is more likely is the emergence of a more pronounced two-tier market as was seen following the global financial crisis.

Availability rose for the third consecutive quarter to 14.3 million sq ft, a 13% rise on Q2. The largest increases in availability were recorded in the Southbank and Tech Belt markets which rose by 56% and 44% respectively. Despite these increases, availability remains 6.6% below the 10-year average. The under-construction pipeline remained stable during the quarter, and currently totals 14.2 million sq ft, 38% of which is already pre-let.

Jeremy Prosser, Principal, City Office Agency, Avison Young, said: “The pandemic has brought health and wellbeing even more to the heart of real estate decision making and further fuelled demand for high-quality space. With limited supply of new stock in most markets, landlords are still able to find tenants and maintain rental values. However, the following months could see this change as the reality of Covid-19’s impact on the economy sets in and occupiers potentially reconsider their space needs following the initial return to the workplace.”

Investment volumes reached £1.2 billion in Q3 2020, 67% down on the 10-year quarterly average. Despite being below average, Q3 investment was considerably higher than the previous quarter, when just £682 million was transacted.

The majority of activity for Q3 took place in July, accounting for 72% of the quarter’s investment, possibly reflective of the release of some pent-up demand which accrued during the Q2 restrictions. Despite the strong start, volumes fell off in August to only £92 million - the lowest monthly total recorded since February 2009 - and September saw just £235 million transact.

A total of 23 deals transacted across the quarter, 60% down on the 10-year average, with two single building sales in excess of 100,000 sq ft. The largest of these was 25 Cabot Square, E14, with 482,000 sq ft being purchased by Link REIT of Hong Kong for £380 million with a circa 5% NIY. This was followed by the 110,000 sq ft purchase of 1 New Oxford Street, WC1, for £174 million with a 4.2% NIY by the Singaporean firm Sun Venture. Overseas investment accounted for 78% of the quarterly total with European and Asian investors particularly active.

Whilst there is a dearth of activity, figures remain well above the levels seen during the bottoms of the cycle in the dot com crash and the GFC when volumes were £777 million and £840 million respectively. Furthermore, there is little upward pressure on prime yields as London remains good value compared to many of its European counterparts.

The material uncertainty that plagued Q2 of 2020 has pushed investors to become more risk-averse, favouring quality stock typically at the core end of the market. The majority of properties transacted in this bracket have achieved pre-Covid or similar pricing.

Chris Gore, Principal, Central London Investment, Avison Young, said: “Demand is expected to pick up in the final quarter of 2020, with significant headline deals under offer already eclipsing Q3 volumes. Whilst there is an up tick in supply this is still dwarfed by the increasing weight of demand particularly by foreign capital looking to take advantage of the weak £ and undoubted bounce back as we near a vaccine.

Further reassurances of the current and future strength in the market can be found in the volume of prime stock that is currently under offer. Additionally, several of the recently completed sales processes have provided a return of multiple bidding rounds which can be taken as a sign of buoyancy in the market.”