Almost one year on from the EU referendum, and following a drop in sterling and significant global political changes, levels of office leasing activity in the City of London continue to show resilience and remain consistent with expectations for this point in the property cycle.
Turning back the clock, the City market has witnessed eye-watering levels of office take-up recently. 2013 saw 7 million sq ft of office take-up, the highest annual amount since 2000. According to Savills research, activity increased further in 2014 to set a new annual record of 8.2 million sq ft, with 2015 seeing 7.4 million sq ft of lettings. To put this in context: these three years saw roughly the same amount of leasing activity as the total for the five years before them.
This flurry of activity left the vacancy rate significantly more constrained than the long-term average (8 per cent), reaching a record low of 4.4 per cent in mid 2015. Unsurprisingly, as the majority of the large requirements had been satisfied, and against a backdrop of record constraint of grade A availability, we and the rest of the market anticipated levels of take-up from 2016 would cool.
Consequently the vacancy rate has begun gradually moving out, and by the end of 2017 we expect a vacancy rate of around 6.5 per cent, well below the long- term average. Meanwhile, with 29 per cent of future City office supply due for completion between 2018 and 2020 already pre-let, there is now a limited supply pipeline. Recent pre-lets include Freshfields Bruckhaus Deringer LLP letting 288,000 sq ft at 100 Bishopsgate, EC2, and Fidelity International letting 104,000 sq ft at 4 Cannon Street, EC4. With these market fundamentals we expect any slowdown in leasing activity or new development – occurring as a result of the market cycle and wider political factors – to be comfortably cushioned.
Furthermore, as developers execute greater caution than in 2013-15, new office buildings in and around the City coming forward in 2021 could be in short supply. At that point, when we expect to have greater clarity around Brexit, we could see strong competition for the best spaces, with new developments letting quickly at record rents. Sound familiar? That’s because The Leadenhall Building and 20 Fenchurch Street – both developed during the last downturn to complete in mid 2014 – were let quickly, have remained fully let, and now boast a record City rent of £107 per sq ft (achieved at The Leadenhall Building in Q3 2016).
Yet many companies are currently strategising business plans around Brexit and choosing to grow their mainland European businesses, JP Morgan’s decision, for instance, to grow its Dublin office from 500 to 1,000 employees. However, J P Morgan will keep approximately 11,000 employees in London and other occupiers are committing their long-term futures to the capital including Apple, Google and Wells Fargo.
Confidence in London’s office market is clearly demonstrated by investor activity: central London (City and West End) recorded its strongest ever first quarter in terms of investment volume in 2017 (£4.34 billion). Foreign investors continue to view London as the safe-haven it’s always been as the financial capital of the world; the home of all the global tech giants, and a cosmopolitan city with a deep and varied talent pool, with the extra attraction of cheap sterling luring buyers. Adding to this are the first signs of a return of UK property companies and funds looking to invest in London after a short pause for breath following the referendum.
Read more: City Office Market Watch