Central London Office Analysis reveals significant rebound with 1.3 million sq ft of take up.

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% 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.

Key statistics and highlights of the occupier market in Q1:

• Total office space take-up of 1.3m sq ft marked the end of five consecutive quarters of decline and was a 48% increase on Q4 2020.
• While take-up was 46% 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% of quarterly take-up in Central London.
• As in Q4 2020, financial services was the most active tenant sector, comprising 26% of quarterly take-up. Again, this was followed by the professional services and then TMT & creative sectors, which accounted for 23% and 16% respectively.
• Availability rose for the fifth consecutive quarter, to 21.7 million sq ft - a 23% rise on Q4 and a 69% increase year-on-year. The central London vacancy rate has subsequently risen from 6.1% to 7.5%, 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% 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 £110 per sq ft for the top floor of the Leadenhall Building.

Alasdair Gurry, Director, City Office Agency, Avison Young, said: “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 £2.2 billion. While this is 43% below the ten-year quarterly average of £3.5 billion (and the £3.6 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.

Key statistics and highlights of the investment market in Q1:

• While traditionally quiet, January saw £518 million transact – more than in the first month of 2020 or 2019. Activity gained steady momentum over the next two months with £733 million worth of deals in February and £759 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% below the 10-year average.
• There were six deals worth £100 million or more; the highest value of which was CBRE GI’s acquisition of Atlantic House, EC4 for £265 million in February. This was followed by Wing Tai Properties Ltd’s purchase of Athene Place, EC4 for £255 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 £812 million transacting - 40.4% of the total seen over the quarter. Midtown was the next most active submarket with £754 million worth of deals, followed by £210 million in the City and £118 million in the Tech Belt.
• 69% of investment came from overseas investors, down from 89% in Q4 2020.
• Prime yields remained relatively stable across Central London – these are 3.5% in the West End and 4% in the City.

Chris Gore, Principal, Central London Investment, Avison Young, said: “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 £265m, 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.”

To read the latest Central London Office Analysis, click here.

Chris Gore

+44 (0)20 7911 2036