For the past couple of years tenants on the hunt for space across central London have benefitted from several factors including high levels of availability, new development schemes, and landlord uncertainty regarding Brexit. It is these that have allowed the negotiating power to rest in the hands of the tenant. However, in 2020 we expect this to start to shift back towards landlords as upward pressure on rents intensifies and incentive levels begin to contract.
The divergence of falling availability and strong demand has reached a point in some districts where there is only one direction for rents to go, that is up. Whilst the average growth rate for prime rents in 2019 was relatively conservative at 3%, areas such as Clerkenwell, Farringdon, King’s Cross and Paddington have gone beyond this pace and set new record rental levels. Predominantly spurred on by new and sometimes taller buildings, for which a premium is sought for both, the rental tone and expectations have risen accordingly. Whilst this is generally anticipated for areas of redevelopment, the latter part of 2019 has seen increased pressure on rents and incentives in traditional office locations such as the City, West End and Midtown where the squeeze on available space has become more acute.
The current supply-demand dynamics mirror those that occurred in 2015. Twoyears of above average level of leasing contributed to a 14% drop in availability. A drop that rapidly continued throughout 2015 and led to an average prime rental growth of 11%. Rental movement in 2015 for some locations took a significant step-change. This is especially the case in areas such as Aldgate where prime Grade A rents increased by 56%. Other examples include King’s Cross and Midtown where prime rents rose by 14% and 13% respectively. Even in the traditional submarkets of Mayfair the rental level jumped by 14% to £130.00 per sq ft. These were indeed market shifting increases in pricing, ones which to some extent are already factored into current levels, despite the few occasions of discounting in the intervening years.
Fast-forward to January 2020 and we have a similar scenario starting the year off with a 14% fall in availability. So, equally are we to expect to see the same level of increase in prime rents over the coming year? Whilst the historical pointers indicate that the coming year could see strong growth in 2020. We believe the strength of this growth will be tempered by the fact some locations have already realised punchy increases and incentives have yet to be reined in by landlords. Taking this into account and appreciating that business confidence may still be shaky until Brexit Phase II has been concluded, our expectation of rental growth is an average of 5% across central London submarkets in 2020.
Whilst our predicted average growth rate appears to be just a notch above what we have seen in 2019, we are mindful of the increases that have already been recorded in some submarkets. The attraction to the best-quality space, willingness to secure it by paying top rents has seen businesses go earlier than needed to beat the competition. Add in the weight of demand in recent quarters it has meant that the pace of pressure on rents has already been exacerbated and we will likely see movement in the first half of the year. Single-digit growth will still push Grade A and B prime rents further into new rental territory for some fringe locations and strengthen rents in more traditional ones.