Recore: Post Q1 confidence grows in London office market

The London office market has emerged from the latest lockdown with growing confidence about occupation and with strong investment pricing, according to the latest report by Recore.

“London remains a strong and stable major international market,” said Richard Linnell, director of Recore. “The leasing market began to improve from a low base in Q1, and the volume of space available disguises a shortage of prime larger units on standard lease lengths.”

The pandemic has affected demand across the market with both the City and the West End now below trend, as tenants consider their requirements in the medium term. However, the  growing recovery over the last two quarters points to requirements being deferred rather than cancelled, according to Recore.

On the development front, many schemes have been delayed by the lockdowns. After a very weak 2020, the supply profile from now on is in balance with normal take-up levels.

Remote working is still prevalent in London, but it is expected to diminish significantly as the lockdown is eased and life returns to normal.

Linnell predicts: “additional space per person will be needed to improve the attractiveness of the workplace, reversing decades of densification, and this will tend to offset any effect on demand of a continuing level of remote working”.

The serviced office/flex sector, which represents around 6% of the London office market, has been under great pressure from reduced rent collection, but it is expected to recover well and provide space that is in demand among smaller space users.

Vacancy rates have increased to 8.9% overall, but half of that space is available for less than five years and 67% is in units of 10,000 sq ft (929 sq m) or less, while 40% is in units of 5,000 sq ft or less.

Shortage of prime space persists and likely to drive rent growth

There continues to be a general supply shortfall of prime space assuming a return to average demand. After a slight fall, this is predicted to drive good rental growth in the medium term.

As for investment volumes, they have been erratic over the last year because of lockdowns and travel restrictions. Q1 was another weak quarter, but Recore expects normal liquidity to return when travel and other restrictions are relaxed from mid-May onwards.

London also has a significant pricing advantage because of the cap rates margin between the UK capital and the main Eurozone cities, although this benefit is partly offset by higher borrowing costs in the UK.