London office requirements have hit the highest level for 10 years with companies on the hunt for close to 12m sq ft of new office space, according to Knight Frank. This figure represents a 34% increase compared to last year, with 80% of these firms intending to upsize, or match their office footprint in the UK capital. Additionally, 40% of these requirements involve a company seeking in excess of 50,000 sq ft of new office space, which will underpin growth in leasing volumes and prime rents over the coming years.

Knight Frank’s 2024 London Series insight provides an analysis of net absorption trends of large leasing deals – higher than 20,000 sq ft – since 2021. The results illustrate a large proportion of companies sought to expand, rather than reduce, the amount of office space they occupy. Overall, the transactions analysed show a net increase of 1.1m sq ft in the amount of space occupiers have leased compared to their previous occupancy.

Prime rental growth and take up remains robust

Knight Frank’s data also reveals that London’s prime office rents remain on an upward trajectory, with vacancies tight for best in class buildings as the future supply pipeline is constrained due to challenges relating to the viability of development schemes.

The City of London has seen 25 leasing deals at prices exceeding £90 sq ft over the past two years, compared to just six in the preceding four years. The West End has seen 142 deals over £100 sq ft in the previous 24 months, compared to 112 in the four prior years.

Total office take up for 2023 finished at 10.7m sq ft against a long-term average of 12m sq ft, supported by a flurry of deals completing in the final quarter of the year. The last three months recorded 3.9m sq ft of leasing transactions, representing the strongest quarterly take-up volume for five years. Furthermore, new and refurbished take-up was 2.6m sq ft and represented the largest level of prime take-up since 2004.

Knight Frank forecasts that office take-up in 2024 will hit 12m sq ft for 2024, 12% higher than last year, driven by higher levels of active requirements, forthcoming lease breaks and the continued move towards newer, better quality offices.

Deals will also be fuelled by leases ending or reaching break clauses, across 28.3m sq ft of office space currently occupied in London between now and 2026, as more companies secure future workspace requirements earlier due to the lack of new office schemes being delivered. This is exacerbated by less than half of the available space in 16 of the 21 London office submarkets qualifying as new or refurbished space. The City saw take up of new or refurbished space in 2023 account for 75% of transactions, while this figure was 53% in the West End.

The development pipeline falls well short of meeting average levels of new and refurbished take-up, with consented schemes that have a 50% to 75% probability of being delivered only adding a further 2.7m sq ft.

Knight Frank believes that the construction pipeline completing by 2026 is 5.3m sq ft below average levels of take-up of new and refurbished space across that period. This shortfall is particularly acute for spaces over 40,000 sq ft, which will result in rental growth for space attracting large occupier deals.

Philip Hobley, head of London offices at Knight Frank, commented: “London’s occupational market remains robust as the bifurcation in demand and transition to office-first work policies continue to crystalise. While vacancy rates have increased in older, secondary buildings, prime rents in best in class offices have continued to rise. The future pipeline cannot satisfy ongoing demand, even at current levels, which is something we haven’t witnessed in previous similar recovery cycles through macroeconomic turbulence. These structural trends should continue to support London’s recovery, particularly in the investment market, with stabilising interest rates making prime office yields more debt accretive.”

But office vacancy rates still expected to rise this year

Despite Knight Frank reporting a rise in demand for office space in the capital, office vacancy rates are still expected to rise by the end of this year, in another blow for the health of London’s commercial property market.

All corporate hot spots are expected to see a rise in empty lots, with vacancy rates expected to hit 12.1% in the City by the end of this year, up from 10.8% recorded in 2023, figures from CoStar show.

In London Docklands – which includes Canary Wharf - vacancy rates are expected to hit 16.6% in the fourth quarter of 2024 up from 15% in the same period last year.

The east-London banking district was dealt a blow last year when HSBC announced it would not renew its lease which expires in 2027 at its landmark tower in the region.