London office demand continues to rise says report

Research from Gerald Eve marks the highest quarter of occupier activity in the London office market since before the pandemic, on par with the pre-Covid five-year average.

Occupier take-up increased for the fourth consecutive quarter in Q4 with just under 3.2 million sq ft of leasing activity, almost 2 million sq ft of which could be attributed to activity in the City.

The real estate implications of the implementation of hybrid working policies came to the fore in recent months. Acquisitions from Google and Omnicom Group will see the consolidation of employees from multiple offices into one.

With ESG also high on occupiers’ agendas, pre-lets over 50,000 sq ft were focused on buildings which are set to achieve BREEAM Excellent or Outstanding ratings, attracting staff with more collaborative, flexible and sustainable work environments.

The resurgence of activity has brought with it the first sign of supply tightening since the pandemic began. Improved letting activity in the second half of 2021 saw overall central London availability dip from 9.4 per cent to 8.7 pr cent in Q4.

Headwinds in the construction sector remain in the near term amid ongoing complications in global supply chains for construction materials, as well as general inflationary pressures and labour shortages. Multiple schemes scheduled for completion in Q4 were delayed, increasing the pipeline for 2022 to a total of 8 million sq ft.

Investment volumes in Q4 were just over £2.5bn, a fall of 25 per cent from the previous quarter. UK investors were the most active group, with £1bn of acquisitions. Value-add product was also a feature with investors renowned for redevelopments notably active.

Both Derwent and Dorrington acquired secondary offices in core locations to reposition in the medium term, highlighting increasing appetite to take on developments.

Lloyd Davies, Partner at Gerald Eve, said: “Whilst the Omicron variant is still hampering some overseas investment activity, the government’s stance encouraging people back to their offices has underpinned improved occupier confidence and investor demand.

“We expect the divergence of performance on both leasing and investment metrics to amplify between good and poor-quality space over this year. However, where there is divergence, there is opportunity, with stock selection being key.

“Value-add refurbishments and development opportunities where there is a focus on environmental enhancement will present investors with the greatest prospects to capture yield compression and rental growth from underperforming assets.”

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