Cushman: London office market facing stock shortage and protracted decision making

Preliminary data suggests that the availability of office space in central London is now at one of its lowest levels since the EU Referendum in 2016. The vacancy rate of office space in central London at the end of the second quarter was 4.5%, compared to 5% last year.  Consequently, prime rents in several of the capital’s submarkets saw positive growth, with the areas surrounding the traditional core returning the strongest performance.

The prime rent in Clerkenwell is now estimated to be £72.50 per sq ft, 8.2% higher than this time last year. In Shoreditch and SE1, the prime rent is now £70.00 per sq ft, indicating growth of 6.1% over the last 12 months.

Although office take-up fell back to 2.3 million sq ft in the second quarter, Cushman & Wakefield anticipates a recovery in activity in the second half of the year, with 3.4 million sq ft currently under offer.

Alistair Brown, Head of London markets at Cushman & Wakefield, explains:

“Falling supply levels are limiting options for prospective occupiers, which is driving office rents upwards. In addition, the supply pipeline of office space looks unlikely to keep pace with demand, which will continue to place upward pressure on the prime rent going forward.”

Patrick Scanlon, Head of UK Offices Insight at Cushman & Wakefield, added:

“The increase in rental values in the second quarter demonstrates London’s strong fundamentals such as access to talent, best-in-class buildings, and restricted supply, all of which have helped maintain the city’s appeal as a global business hub.”

Investment volumes have remained relatively subdued across Central London with approximately £3.4 billion expected to be transacted in the second quarter of 2019, taking the year to date total to £5.5 billion. This represents a fall of 37% on the volumes seen in the first half of 2018, and has been driven by a distinct lack of supply. Demand however, remains buoyant and there is £2.1 billion currently under offer in 20 deals across London, which is more than double the amount seen this time last year.

The most active investors in H1 2019 have been from North America, representing 35% of all investment to date, closely followed by UK investors representing 32%. This is in sharp contrast to the first half of 2018 where Far Eastern investors accounted for 48% of all investment activity. 

Martin Lay, Co-head of London Capital Markets at Cushman & Wakefield, said:

“Whilst transactions are generally taking longer to get across the line, our recent sales have proved that there remains a significant weight of both domestic and overseas capital looking to enter the London market, which is looking attractively priced against most of the other global gateway cities. Activity however is continuing to be held back by a lack of available opportunities, as reflected by only 14 assets with a total investment volume of £639 million being brought to the market so far in June, compared with £2,724 million in 37 deals this time last year.” 

[email protected]