City Leasing
Q1 2023 has remained subdued with take-up weak as a result of occupier cautiousness. Economic uncertainty has intensified as The Bank of England once again increased interest rates which have risen eleven times since December 2021 to 4.25%. Economic sentiment has suffered further with UBS’s takeover of Credit Suisse and HSBC’s £1 rescue of SVB’s UK arm. Despite this, occupier markets have remained calm with central banks providing additional liquidity and support.
Take up has understandably slowed amongst this difficult economic sentiment, with total deals down 25% compared to this time last year and below the 10-year average. Notably, Helical's JJ Mack Building was under offer at £112 per sqft on the top two floors. This deal was placed on hold as a direct result of the SVB bank collapse, although it should be noted that very few deals have stalled directly as a result of SVB. In particular, the market has seen transaction speed slump with under offers and legal timescales lengthening in recent months.
Insurance, finance and law firms have continued to drive activity, along with serviced office providers who have seen current occupier sentiment for flexible fitted space as an opportunity with The Office Group acquiring the 1st and part 2nd floors (43,000 sqft) of Blue Fin building in partnership with Oxford Properties and Orega expanding their product across the 3rd and 4th floors of 70 Mark Lane (28,000 sqft, Allsop transaction).
The ‘flight to quality’ trend has continued to propel activity with the best buildings attracting the best rents. Grade A space in the City is achieving c.£77.50 per sqft and tower floors hitting in excess of £95.00 per sqft and £100.00 per sqft in 22 Bishopsgate.
The City fringe has continued to perform well with several notable high-profile transactions including Buro Happold’s recent 31,000 sqft acquisition at The Featherstone Building and Frontier Economics’ 33,000 sqft pre-let at Worship Square. Frontier Economics, an economic consultancy firm, will take the 6th – 8th floors on a 10-year straight term at a blended rate in the high £80.00's. The Bloom building in Clerkenwell also achieved £100.00 per sqft on the 7th floor to Snapchat who already occupy 114,000 sqft in the building. However, there are still voids in the Fringes with the struggling Tech sector. Notably at HYLO, 38% has been let with 180,467 sqft remaining vacant with a c.18-month average leasing void.
The City vacancy rate currently sits at 9.6%, above pre-pandemic levels. Although vacancy rates appear high, prime office stock is low, and most of the vacant space includes Grade B space suffering in light of the ‘flight to quality’ trend. Growing prime office demand should be met with an increased development pipeline delivering 16M sqft over the next five years, although much of this is either already committed or is expected to be delayed considering rising construction costs, skilled labour shortages and uncertainty over interest rates. This is likely to lead to a shortage of Grade A stock between 2024-25.
Demand throughout Q1 was encouraging. The Allsop weekly tracker has seen market enquires 10% up when compared to the 2022 weekly average. Fully fitted space has been particularly popular for sub 10,000 sqft space and is emerging as a vital marketing strategy for landlords looking to minimise void periods and a priority for occupiers looking to minimise capital expenditure. Ultimately, the occupational market is holding up well despite intensified economic uncertainty as demand for new build/prime stock continues to grow into the year.
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