According to new research from our EMEA Occupier Services team, the majority of London is currently a ‘tenant favourable market’, a step change in a market that has been relatively neutral since 2008. In fact, these are the most tenant favourable conditions that I can think of since the GFC.
So what exactly is making London a tenant favourable market? It boils down to the fact that occupiers currently hold all the cards, as activity in the capital is subdued. While there are still companies looking for space, requirement levels remain 50 per cent below average, and for those seriously looking, there is very little competition for space, except perhaps on the very best product, of which there isn’t much available.
As we emerge from this pandemic, many will be reviewing their office space be that for a reduction, an increase, or a complete change in the type of workplace they want to occupy. Although there is light at the end of the tunnel in terms of removing lockdown restrictions in the UK, it will take longer for the economy to recover and financial decisions will still be under heavy scrutiny at many firms for the foreseeable future. But alongside a return to relative normality for day to day life in the summer, we should see a far more buoyant London office market as tenants seek to get more from their space following a year of working from home.
Incentives for tenants
The tenant favourable conditions we are seeing include incentives such as flexible leases and rent-free periods, particularly important for firms signing for new office space. Over the last decade we have seen lease lengths of 5-10 years become the norm, however as the market softens these are set to reduce to 3-5 years to allow for increased agility. Additional incentives such as rent-free periods and capital payments will make the market even more attractive to tenants.
Since the GFC London landlords have had a relatively easy time; space has been in demand and the majority of costs such as fit out and service charges have fallen to the tenant. As occupiers look to return to the office this summer, priorities will have inevitably shifted and there will be more scrutiny of the quality and credentials of space, particularly from a clean air perspective. Being able to secure space that fits with their new list of priorities will be even more attractive to occupiers alongside the incentives mentioned above.
What does this mean for rents in central London? At the moment average rents for the West End and City stand at £85 per sq ft and £70 per sq ft respectively. Prime rents will remain relatively stable as demand for the best space is set to only accelerate with the return to the office and stock is already in short supply. However I do expect rental readjustment downwards for London to take place in the second half of 2021 as the market catches up with itself and we see the impact of the removal of governmental support on businesses and landlords.
About the Author
Stuart Melrose has over 15 years’ experience in the commercial real estate industry, having worked in both the U.S. and U.K. markets. To get in touch, contact Stuart.Melrose@colliers.com.