PRIME RENTS DECLINE

The significantly lower number of leasing transactions in Q2 2020 and expectations of tougher market conditions have meant that prime rents across most central London office submarkets have succumbed to downward pressure. This follows the brief pause in rental movement in Q1 2020, which signalled the end of a strong two-year run of upward rental growth. The resulting pressure translates into an average decrease of 4% across all submarkets and grade, the first such cross – London fall in rents since Q2 2008 when rental decline averaged 3% at the outset of the Global Financial Crisis (GFC).

DeVono Cresa’s Insights team tracks office prime rents using a combination of completed deal information, quoting rents, and in-house knowledge and experience. Earlier in the year, our predictions for rental decreases were tempered, like most others, the impact of lockdown and its extent were slowly unfolding. Whilst our research shows that rental decline has occurred at a faster pace, we are cognisant that the steepness of the overall decline will vary not just market-by-market but building-by-building as landlords gauge market appetite on a micro-level, resulting in some available spaces holding onto their higher rents.

Our research shows that prime rents on Grade A space dipped by an average of 3% across all submarkets since Q1 2020. The greatest drop was in the West End, where prime rents in Mayfair and Soho both have notched down by 8% to £110.00 per sq ft and £90.00 respectively. Similarly, in the Aldgate area of the City rents also dropped by 8% to £60.00 per sq ft.

Not all submarkets have recorded a decline, five out the 21 submarkets we track, have remained the same. The largest of which is the Docklands office market where a reduction in Grade A options helps maintain prime Grade A rents at £52.50 per sq ft. Likewise in the Southbank, where prime Grade A rents continue to command £72.50 per sq ft propped up by the short supply of Grade A space. 

 

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In the City, the largest office market in central London has seen the prime rent chipped away by just 2% to £68.50 per sq ft in the City Core. Returning to the same level as at the same point in 2019. Prime rents in this submarket have fluctuated from £65.00 per sq ft to £70.00 per sq ft for the past six and a half years. Buoyed by a consistent level of office availability averaging 4.9 million sq ft, the latest decline is in line with the overall movement in the volume of availability.

Grade B prime rents have dropped by an average of 5% across all submarkets. The rise in second-hand space across central London has been one of the main drivers of the latest downward revision in the rental level. However, in some submarkets, the reduction in rents has come off the back of a strong acceleration of rental growth in the latter part of 2019. What we see now is those rental gains being muted or nullified as landlords are faced with increased competition in the Grade B office market.

Prime Grade B rents in the Aldgate area have seen the largest fall in the quarter by 11% to £42.50 per sq ft, the same level as in Q1 2019. Elsewhere in the City, Grade B rents in the core have dropped by 9%. Yet, in the Clerkenwell/ Farringdon area, the fall has been more subdued by just 2%. Likewise in the Old Street/Shoreditch area rents have decreased by only 4% – accounting for the continued demand for quality space in these areas.

The Southbank, Hammersmith, White City, and Stratford are locations that have seen no movement in the rental level. These are areas that continue to have a relatively small scale of high-quality Grade B availability, thus maintaining the rental profile for another quarter.

The possibility of further rental declines in 2020 is not off the table, especially if the movement of market fundamentals of supply and demand gather momentum in the same direction as Q2.