PRESSURE MOUNTS FOR RENT RISE
Rents largely remained static in 2021, with few instances of increases or further reductions, meaning that prime rents ended the year on average 6% lower than at the start of the pandemic, back in Q1 2020. This has provided businesses with the opportunity to secure their next workplace at advantageous rents and even better incentives. Yet with the return to near normal levels of leasing activity in both Q3 and Q4, this demand will slowly start to influence landlord expectations.
The level of rent-free incentives being offered on a lease have already started to be reduced, the average on 10-year lease is now 25 months. This will vary depending on location and other deal provisions, but overall the number of months will become a negotiating point. Those landlords who are keen to secure a tenant will still be creative with incentives.
Prime Grade A rents will face the greatest pressure to increase, despite the above average volume of availability for this type of space, the expectant occupier demand will help dictate asking rents. Areas that are likely to face a short-term squeeze on Grade A space, such as Mayfair-St James’s, Soho and some fringe areas will see rents revised quicker than other locations. Some smaller and niche offices in and around Mayfair are securing rents in excess of £115.00 per SQ FT, this lends further impetus to eventual rises in this market.
Top floor spaces have always commanded rents above the generally prime but asking rents are now exceeding £90 per SQ FT, with anecdotal evidence of £100 per SQ FT. Even towers that were developed less than 10 years ago and are now seeing their second or even third generation of tenants coming back.
SECONDHAND SPACE OPPORTUNITY
Prime Grade B rents are facing less pressure to revise upwards in the short-term. The greatest factor at play for this type of space is the amount that remains available, especially in the larger markets of the City, West End and Docklands. The competitive nature of these markets and this quality of space will see rents subdued at least for the first half of 2022.
PAYING THE GREEN PRICE
As more and more business look to embed environmental and sustainable goals within their workplace strategies, the attraction of ‘green’ or ‘greener’ buildings could come at a price. These buildings are often the new or refurbished, and as such will always command a higher price akin to prime Grade A. As the demand for such spaces looks set to increase in the coming months and years, we expect that rents will hold steady at the top end. As the industry pivots towards net-zero properties and the government looks set to legislate further on building energy performance, we expect that sustainable spaces will come at a cost.
OUTLOOK FOR 2022
Our outlook for prime rental growth has shifted over the course of the past few months, recognising that the window of opportunity for tenants is closing in some parts of central London. The latter part of 2022 is expected to record rises, although they will be muted and dependant on levels of demand. Whilst much focus is put on new office searches and associated rents, very little is given to businesses who opt to stay in the same space and face renewal negotiations.
To view the full data for London leasehold office rents, click here.
GREATER APPRECIATION FOR FLEX SPACES
The return-to-the-office has not been smooth, a false start in 2020 followed by another attempt in 2021 it is no surprise that businesses are finding it difficult to firm up workplace strategies. We should be under no illusion that hybrid working is here to stay, according to a CIPD survey 40% of employers expect more than half their employees to work from home.
What has become one of the main conundrums from a space planning perspective is identifying who you need to provide space for and when. Not so simple when most people have adopted a variety of working patterns and locations. The serviced office or alternative flexible solutions such as coworking has grown in appreciation and being adopted at a greater frequency.
During 2020 and 2021 serviced office providers in their bid to attract new customers ensured that contracts were as flexible as possible, which also included the pricing. The year ended with desk rates across central London holding steady in the face rising pressure following uplifts in Q3. The average desk rate for Grade A space remained at £739 per desk, per month, with the higher of the range being £1,075 in Mayfair-St James’s submarket. As the best-in-class centres start to secure more businesses we expect the upper end of pricing to edge northwards, especially in the West End submarkets that are more susceptible to occupancy fluctuations.
Grade B serviced office space continues to offer value with the average desk rate at £513 per desk, per month. Whilst this grade of serviced office is in greater supply, we remain cognisant that some centres may not be as attractive to prospective tenants and expect pricing to match accordingly.
Businesses have long wanted flexibility from their real estate, being tied to a lease is the complete antithesis of this. Whilst short leases, subleases and assignments can offer some flexibility, a managed office solution can offer more. Often described as a hybrid solution between serviced and conventional leasing, providing the benefits of a fully fitted, plug and play serviced office workspace, without onsite support or the breadth of communal conveniences.
It is not a new product but is one that is growing in demand and meeting the needs of businesses that have faced uncertainty and space rationalisation. The number of providers that are offering managed office solutions has increased in recent years, and now range from the managed specialists, the general serviced office providers through to landlords.
The cost of a managed space can vary like the rest of the market, based on the usual factors of location, quality, specification and commitment term. Calculated on a per SQ FT basis similar to leasehold our managed office cost guide, which complements our general serviced office desk rates, is for a self-contained office with fit-out and based on two-year contract, prices will vary upon level of customisation and lease length.
The average price for a Grade A office at the end Q4 2021 stood at £150 per SQ FT, and for Grade B it is £118 per SQ FT. These figures are highly dependant on the current offerings, there are expectations that the like the rest of the market we will see increasing pressure on these levels to rise.
OUTLOOK FOR 2022
As demand increases for all serviced office solutions providers are once again on the lookout for spaces. In 2021, providers leased over 460,000 SQ FT of office space across 20 buildings, representing a 173% increase on 2020 space take. Not quite the 2.1 million SQ FT in 2019 but highlights that the sector is in expansion following a bumpy couple of years. This renewed commitment to new centres will benefit prospective occupiers as greater competition and choice will help subdue the mounting pressure on pricing, in the short-to-medium term.
The serviced office market is poised to capitalise on the shift in working trends and workplace expectations in 2022. But this year is the start, the real change will be noticed in 2023 as businesses will have gathered sufficient information to make bold changes.
To view the full data for London Flexible Offices Rent Guide, click here.
To find out more about key insights for Q4 2021 and the outlook for 2022, download The Occupier here: https://www.devono.com/insights/