The latest (Q1 2022) Central London Office Market Snapshot from DeVono has found that difficulties in attracting new talent, a greater shift to hybrid working patterns, embarking on a sustainability journey, a weakening economy and rising inflation are increasingly impacting business optimism. To top it all off, political uncertainty resulting from Russia’s invasion of Ukraine is trickling through to corporate risk appetite the firm says.

Despite these economic challenges, DeVono says that a downturn in confidence has not yet filtered through to leasing activity across central London in Q1 2022, with take-up surpassing both 3m sq ft and the long-term quarterly average for the third consecutive quarter. This represents the strongest start to a year since 2019, and the second highest level of office leasing for a first quarter in over ten years.

In addition, DeVono research shows that the number of transactions across central London submarkets in Q1 2022 reached 529, a return to a level last seen in 2019, suggesting that tenant appetite for offices has indeed returned.

On further analysis, leasing activity exceeded the short-term quarterly average in three out of eight London submarkets in Q1 2022, with the greatest uptick in Midtown where leasing was 72% above the average at approximately 680,000 sq ft, and just shy (-3%) of the recent high in Q3 2018. The financial sector continues to sustain leasing activity across central London, and in Q1 2022 the sector accounted for just over a quarter of all leasing.

Regarding the Elizabeth Line, Devono says that the improved connectivity is expected to bring many benefits, not least of all increasing the talent pool by providing a faster service to those in the West, East and South of the capital. ‘It will also open up parts of London some businesses have not entertained before, such as Paddington, Canary Wharf, Stratford, or even outside of the central zone and look further afield such as Reading.’

Office availability

Expectations that the level of available office space across central London had peaked at the end of 2021 were a touch optimistic. The total volume rose once again by 1% to 23.3m sq ft at the end of Q1 2022, the highest level since 2010. Some locations did however see a drop in office space available though, with the North Fringe (N1), West End and East Fringe (E1) submarkets ending the quarter falling by 12%, 8% and 3% respectively.

But it appears that stubborn levels of second-hand space persist to prop up availability, with businesses renewed appetite for leasing continuing to nibble away at available stock and not making much of a dent. Office availability in the Docklands market continued to climb in Q1 2022, representing the eighth consecutive quarterly rise. At 2.8m sq ft, this level is just 1% away from matching the 1995 high point, according to the report.

In the West End, availability levels have edged downwards for the first time since Q1 2020. However, at 4.7m sq ft, the amount of office space available is still 12% higher than at the same point in 2021 and is the same level as Q1 2018, the last peak in availability.

The City is the largest office market in central London and at 8.8m sq ft, it accounts for 38% of all space available. The latest increase in volume sees it surpassing the recent highs of 2011-12 and it is now up at a level last seen at the height of the global financial crisis in 2009.

DeVono states: ‘Unlike in previous periods of economic uncertainty, construction of new office space was not halted or mothballed because of the pandemic, we merely saw schemes delayed. As such there is a strong pipeline of office development coming through over the next 18-24 months.

‘Aging office stock will increasingly be redeveloped over the coming months and years, as government and industry targets on sustainable office provision ramps up a gear. The result of which will be an increased range of space choices.

‘A greater understanding of the impact of hybrid working patterns and how that dictates office design, use, size and location, both on the part of the occupier and landlord will lead to a variety of opportunities to be explored.

‘For landlords this means delivering cost effective solutions that meet more stringent budgets, actively offering flexible leasing options, or even nurturing tenant relationships to deliver on sustainability, space use and loyalty. The workplace landscape is continuing to shift at varying paces and ensuring that all elements align at the right time will be difficult, but there is some solace that the tenant still retains a certain level of negotiating power, for the time being.’

Landlords rein in lease incentives

DeVono concludes: ‘Increased leasing activity over the past nine months has paved the way for landlords to harden their approach to the tone of rent-free’s being offered. As such we have seen a widespread reduction in the number of rent-free months proposed on a typical 10-year lease down to an average of 24 months across all submarkets.

‘In the West End, rent-free’s have decreased by two months, down to an average of 22 months. The highest incentive level in this market can be found in Paddington and Camden with 24 months.’