Immediately before and after the UK’s referendum to leave the European Union in 2016 office leasing activity across central London pretty much fell off a cliff. The realisation soon hit that businesses could not put off major real estate decisions and office demand subsequently rebounded. We have since recorded two years of an above average level of transactions.

COMPETITION FOR THE CUSTOMER

Brexit day is fast approaching and with no clarity as to how the UK will exit, the uncertainty will once again lead some firms to defer their decisions. We expect demand to therefore be somewhat cautious as we head towards Q2 2019, but that this will be measured and short lived with the market regaining confidence for the remainder of the year. As we have stated before, some decisions will be more pressing and impossible to avoid. Nevertheless, pressure will mount on current prime rents and we could start seeing some levels chipped-away. If so, where do we expect them to occur?

UPS AND DOWNS

Prime rental levels across the central London submarkets increased marginally by 4% in 2018 and this was largely as a result of increases in areas outside of the core locations. It is our belief that if any areas are to succumb to downward movement it would be those true core locations in the traditional markets of the West End and the City. The highest prime Grade A rents can still be found in Mayfair- St James’s commanding £115.00 per sq ft, representing a drop in the latter part of the year, having consistently been at £125.00 per sq ft throughout 2017 and most of 2018. Prime Grade B rents have held on at £82.50 per sq ft since the end of 2017 as the second-hand market still has a substantial level of available space.

Our historical timeseries shows that in core markets, a plateauing of both prime Grade A and B rents for a significant period of time could well be a precursor to impending downward pressure on the Grade A rental level. This was indeed the case for the Mayfair/St James’s submarket, therefore keep a keen eye on other locations such as Covent Garden and the City Core, both displaying a similar trend. Whilst landlords have offered generous levels of incentives in order to retain higher asking rents, the market dynamics going into 2019 suggest that this may not last. Heavy competition from competing buildings and increasing number of serviced/flexible office centres popping up in core locations, downward pressure on rents will be strong.

Yet, the dichotomy of the London office market means that just around the corner from an area with declining rents is an area or even a building that is setting higher rents. This has been the case in 2018 with submarkets such as the City Fringe West and North, Paddington and areas in East London all having seen an increase in the rental profile of Grade A and B spaces. With a number of new buildings set to be delivered into these locations over the coming year, we expect further upwards rental movement in developing submarkets. The current market and economic circumstances should help to mute any rises we see in 2019. Nevertheless, we believe that tenants who are willing to commit are well placed to benefit from market disruption and uncertainty that is sure to continue through 2019.