London office market returns to normality in latter half of 2021

Q4 2021 sees largest amount of quarterly space let since 2019 according to Avison Young’s Central London Office Analysis.

Q4 2021 sees largest amount of quarterly space let since 2019 according to Avison Young’s Central London Office Analysis.

Avison Young’s latest research has found that occupier activity in the London office market last quarter increased to 3.1 million sq ft, 27% above the previous quarter, to reach levels last seen in 2019 in a strong sign that London’s occupiers are approaching their workplace strategies and office use with increased confidence. This is confirmed by the fact that nine deals above 100,000 sq ft completed during the last six months, more than in the preceding eighteen months combined.

This figure also represents a 29% increase against the ten-year average and a 21% increase on typical pre-pandemic quarterly volumes. 132 individual deals completed in the period; representing a fourth consecutive quarterly increase in both the volume of completed transactions and in the quantity of space let.

With London’s office market gradually building back its strength across 2021, this culminated in an end-of-year take-up total of 8.8 million sq ft – a 71% uplift on the letting volumes seen in 2020. Although this total is 9% down on the long-term average for annual take-up, this is reflective of the stringent restrictions the market was operating under for much of the first half of 2021.

Key statistics and highlights of the occupier market in Q4:

• Total office space take-up across Central London increased for the fourth consecutive quarter, totalling 3.1m sq ft in Q4 2021, a 27% increase on Q3 and the largest amount of quarterly space let since Q4 2019.
• Allen & Overy’s 267,000 sq ft letting at 1-2 Broadgate, EC2, was the largest deal of the quarter. This was supplemented by a further 14 deals above 50,000 sq ft – which is the highest volume in a single quarter within this larger size band recorded in London since the global financial crisis.
• This quarterly total comprised 132 individual deals – representing a fourth consecutive increase in the volume of completed transactions (as well as space let).
• Occupiers within the tech & creative sector were paramount in driving quarterly take-up, accounting for more than 30% of overall activity. This was followed by the professional services sector and the financial sector which accounted for 23% and 16% respectively.
• As letting volumes improved across 2021 availability has begun to taper off, having risen for five consecutive quarters across 2020 and early 2021. The amount of available space now totals 20.7 million sq ft, which, although reflective of a 3% drop against the previous quarter, is still 33% ahead of the ten-year average.
• The central London vacancy rate has marginally fallen to 7.2%, down 0.1 percentage points on the previous quarter - almost two percentage points ahead of the post-GFC typical vacancy rate for Central London.

Nick Rock, Principal, West End Agency, Avison Young, said: “London’s office market has gradually built back its strength across 2021, culminating in an end-of-year take-up total that is a 71% increase on 2020.

“Seven out of the eight largest transactions in Q4 were either pre-lets for developments under construction or for new-build space – indicating the skew of demand from occupiers for offices which can best satisfy an increasingly sophisticated list of requirements. This appetite for best-in-class space has helped to support the stabilisation and recovery in rental tone across 2021 – with our figures now indicating that prime rents in the City, Southbank, West End and West London submarkets are ahead of where they were at the end of 2019 after experiencing a correction during the depths of the pandemic.

“More broadly for London’s business community, there are several more reasons for optimism moving into 2022. Oxford Economics forecasts that GVA will tick upwards by 5.7% across the year; and that office-based employment in London is likely to grow by around 2% overall - a figure which outpaces the equivalent growth expected in Paris and Berlin.”

Momentum was maintained in the London office investment market at the end of 2021, as a total of £3.5 billion transacted over the last three months of 2021 – slightly ahead of the 10-year quarterly average and representing a 16% uplift on Q3 turnover.

This means that across the whole of 2021, almost £12 billion was invested into London offices. While this figure is 15% behind the ten-year average for annual volumes, it represents a 53% uplift against activity in 2020 and is 29% ahead of 2019 investment.

In spite of travel restrictions, overseas buyers comprised 71% of annual turnover, as North American and European buyers were particularly active in targeting London office assets for steady returns in an uncertain environment.

Key statistics and highlights of the investment market in Q4:

• Q4 2021 saw £3.56 billion transact, representing a 16% uplift on Q3 turnover, and marginally ahead of the 10-year quarterly average.
• Across 2021 as a whole, almost £12 billion was spent on London office assets - 15% behind the ten-year average for annual turnover, but a 53% uplift on 2020 volumes and 29% ahead of 2019.
• The largest individual deal of the quarter saw US media giant Omnicom acquire its own London headquarters at 2-3 Bankside, SE1, in a £440m deal – significantly above the original quoting price of £400 million.
• Foreign buyers accounted for 73% of investment in Q4 and were responsible for a similar proportion of overall investment in 2021 as a whole at 71%, with North American and European buyers particularly active.
• North American buyers dominated the investment picture in Q4 – accounting for nearly 40% of overall spend. This meant that they leapfrogged European buyers in the standings for full-year investment into London offices, with the latter comprising 25% of turnover as against 28% for the North American cohort.
• The West End was the most active submarket for quarterly investment, attracting deals worth £1,282.2 million, while the City saw £406.2 million in turnover.
• £2,508 million of investment came from overseas investors, while UK property companies provided £474.1 million of investment and UK institutions £442.1 million.
• Prime yields remained stable across Central London – these are 3.25% in the West End and 4.0% in the City.

Jamie Olley, Principal, Central London Investment, Avison Young, said: “While the lockdown at the start of 2021 might have put a slight dampener on market activity in Q1, buyers have sprung back to life since; with overall spend surpassing £3 billion in each of the last three quarterly periods and ending with turnover outpacing the long-term average for all quarters in Q4, at just over £3.5 billion.

“While prime income is still being heavily sought-after in the main; we have also seen a variety of different transaction types underpinning the strong end to the year – including occupier purchases, site acquisitions, and a spate of value-add deals to boot.

“This means that across the year, almost £12 billion was spent on London office assets by investors. While this is 15% behind the ten-year average for annual turnover, it nevertheless represents a 53% uplift on 2020 volumes, and comes in 29% ahead of 2019 as global capital once again found its way to London’s shores despite travel restrictions pervading much of the year.

For investors, the market remains steadfastly competitive – particularly for the highest-quality products which tick boxes on both occupier requirements and environmental performance. 2022 brings with it fresh hopes that the virus (and variants) will recede further in influencing both working patterns and the shape of international investment – and that London’s long-standing reputation as a prominent business hub can underpin further upticks in activity.”

The full Central London Office Analysis report is available to view here.