ESG requirements and talent retention driving demand
2021 was a turbulent year for the London office market, with lockdowns and other COVID-19 restrictions hampering activity at the start of the year, and the Omicron variant coming in at the end of December to remind us all the pandemic is not yet over. However, there was large part of 2021 where activity was picking up in both the occupational and investor markets, and sentiment had been increasingly positive before the new variant emerged.
So, what is the outlook for 2022? It’s fair to say that the road ahead is much more positive than this time last year, with the vaccine and booster programmes (so far) enabling restrictions to be kept to a minimum. We have identified some trends that we feel will shape the London office market over the next 12 months:
Quality over quantityDemand for prime Grade A space surged in 2021, with occupiers of significant size generally only considering new or space already fitted out by the landlord. Grade A transactions accounted for 55 per cent of transactional activity across London in 2021, the highest level since 2017. Given that 1.4 million sq ft of office pipeline space is currently under offer, we expect Grade A take-up levels in 2022 to remain at the same level as a proportion of overall transactions, possibly trending at 60-65 per cent compared to previous long-term average of 53 per cent. There has been a shift in occupiers’ expectations: “good enough, is no longer good enough.”
Office pre-letting set to increaseSix million sq ft of office space is currently under construction and due to complete in 2022, but 58 per cent of that is either pre-let/sold or under offer. The success of 1 Paddington Square (438,000 sq ft), due to complete in mid-2022, where the entire scheme is under offer, typifies the problems for larger occupiers and corporations with 100,000 sq ft requirements. Some 25 such requirements are currently circling the market totalling over 4.5 million sq ft. Competition for “super-prime” space, with well-located, future-proofed and sustainable assets will increase in 2022 and beyond - there’s potential for slow-moving occupiers to miss out on the best space.
More refurbishment activity in-line with ESG requirementsThe ramping up of sustainable buildings legislation will mean the April 2023 EPC deadline for minimum Grade E requirement will be upon landlords all too soon. London-based REITS are already aiming to upgrade all stock, where required, to EPC Grade C, prior to April 2023. Expect an end to ‘light touch’ refurbishments with comprehensive office upgrades not only set to be legislation-proof but proving most attractive to potential occupiers, as well as offering a chance for significant pricing improvements. This comprehensive refurbishment strategy will not appeal to all, so expect an increase in value-add/refurb investments opportunities coming to market, some at discounted prices. Change of use strategies will also come back into focus, as has been the case with some core retail offering being reinvented as prime office product.
War for talent rages onThe pandemic has acted as a catalyst to pre-existing trends that have impacted the hiring and retention of talent. “The Great Resignation” demonstrated that employees are re-evaluating their priorities and are willing to switch jobs to find an environment that is better suited to their personal preferences and goals. The workplace plays a significant role in the attraction and retention of employees, and workers have greater expectations for the quality of their office space in a post-pandemic world. The competition for the top talent in London is increasing, with the lines between sectors increasingly blurred. Put simply, those organisations with the best offices, combined with a progressive and flexible attitude to hybrid working, will find it easier to attract and retain employees.
Strong finish to 2021 set to carry through to 2022Regardless of the current government requirement for people to work from home where possible, the London office market demonstrated a very strong end to 2021, with a significant amount of space under offer at the start of 2022. There is a renewed sense of optimism that 2022 will be a positive year for London, as occupiers look to action relocation or expansion plans and investors seek opportunities in the market where prime rental growth is set to return.
About the author
Christopher Dunn began working in the property industry at rating specialist CVS in 2014. In 2021, he joined Colliers as Head of Insights for the London Offices team from Cushman & Wakefield where he worked in the UK Research & Insight team for over six years, focussing on the central London office market. At Colliers he is responsible for producing forward-looking thought leadership content on key trends that are impacting London. He regularly presents to clients and contributes to industry publications on topics relevant to London offices.
To contact Chris, email Christopher.Dunn@colliers.com