London’s commercial real estate market saw a strong rise in activity in the third quarter as businesses pushed ahead with relocation and expansion plans, according to the latest research from Knight Frank. 

The firm said that take-up of Central London office space in the third quarter of this year was 55% higher than the previous quarter, with a total of 2.63m sq ft leased from more than 220 deals. 

Average prime rents in both the West End and City have risen to an all-time high as competition has increased for best-in-class space that offers strong sustainability performance and the most attractive amenities for office workers. Prime rents in the West End rose from an average of £115 sq ft in Q2 to £117.50 sq ft in Q3, and rose from £72.50 sq ft to £75 sq ft in the City core area. 

Knight Frank reported: ‘The stock of available space has stabilised with a marginal fall in Q3, currently standing at 18.71m sq ft, a vacancy rate of 7.7%. The largest fall in availability was in the City Core where the vacancy rate fell from 9.3% to 8.4%. The number of office occupiers looking to release excess space back to the market also fell by 541,000 sq ft in Q3, of which 53% was taken back for re-occupation, as confidence in the economy improved and pandemic restrictions came to an end in the UK.

‘Leasing activity in the quarter was driven by the Professional Services sector, which made up 21% (552,000 sq ft) of all new leases, and tech, which made up 19% (500,000 sq ft). Flexible office providers also returned to the market, making up 8% (210,000 sq ft) of all new deals in Q3.’

According to the report, the increase in leasing activity is set to continue into Q4 and the new year, with live requirements for office space in London’s key office submarkets increasing in Q3, up 12% in the City Core to over 5.2m sq ft, and up 15% to 1.3m sq ft in the West End.

‘Financial Services is set to be a key driver of future demand, making up 32% of live requirements for space across Central London, while Professional Services make up 27% of firms currently seeking new space – representing 4.9m sq ft of demand for new space. Overall demand for office space across London stands at 8.3m sq ft.’ 

Investment returns to 2018 levels
The investment market saw its busiest third quarter since 2018, with investment volumes rising to £3.83bn, up 23% on Q2. European investors were the most active in the London market, making up 35% of all transactions (£1.34bn), with investors attracted to London’s high yielding assets relative to Europe’s gateway cities. North American investors made up 22% of acquisitions (£843m). 

Philip Hobley, co-chairman of London offices at Knight Frank, commented: “The London office market is increasingly competitive, as occupiers increasingly find themselves in competition for best-in-class space that performs strongly on sustainability grounds, supporting corporate goals and offering wellness and amenity rich space to support their employees. This has helped to push rents through pre-pandemic levels in both the West End and City Core markets. Companies also have a much clearer sense of their office requirements and workplace strategies after a period of reflection during the pandemic, and that is visible in both the level of take-up and rising demand for space, but also the number of firms who have cancelled plans to release space back to the market.” 

Shabab Qadar, London research partner at Knight Frank, added: “As well as continued strong demand for the highest quality new build office space, there has been a notable uptick in take-up of second-hand space, indicating a more balanced recovery across the market than we have seen since the start of the pandemic. It is also telling that London’s traditionally strongest sectors of Professional Services and Financial Services once again make up the majority of active requirements for new space, after a period in which the Tech sector has been the biggest driver of demand.

“In the investment market capital values for London offices look especially attractive to international investors as the value of sterling remains relatively low compared to other leading currencies, and there is rising optimism about near-term growth prospects.”