London Markets - Q4 2020

The theme for 2020 was one of muted occupier activity, with annual take-up for 2020 totalling just under 7m sq ft. Throughout the second half of the year, occupiers effectively pushed the pause button when approaching lease decisions. Also, the imposition of lockdown on 5th January has pushed business decisions on office space 3-6 months further down the line.

Thus, we expect the trend of reduced demand to continue through Q1 but anticipate activity will pick up towards the summer. By then, business will begin to materially understand and enact strategies on their post-COVID office requirements, with a view to return to the office when vaccine numbers paint a more positive picture. Leasing activity in H2 2020 was down sharply, with the total amounting to 2.35m sq ft. Activity in Q3 totalled 1.3m sq ft, while Q4 marked a record low quarterly volume of 1.05m sq ft.

Respectively, these levels are 59% and 67% below the previous five-year quarterly average. On a rolling 4-quarter basis, this marks the lowest level of occupier activity since our records began in 2000 and even lower than the level seen during the GFC.

However, unlike the GFC, the sharp drop in demand at present, does not mark a structural shift but a frictional period in activity. This is because there is not a dearth of demand like in 2008-2009, where all sectors, including office-based services, were simultaneously hit by the poor economic situation.

Over the last year, office-based services have been able to continue to function almost as normal through homeworking and have not seen extensive job losses as in the GFC. The wait-and-see approach occupiers have adopted means there is pent-up demand waiting on the side lines, owing to the current frictional nature of London office demand.

The view on rents

The lack of recent transactional evidence makes quantifying rental movements difficult. Landlords have maintained headline rents for high quality stock at pre-COVID levels but have shifted to more flexibility within lease terms. This has meant that the projected sharp fall in rental values feared during the first lockdown did not materialise through 2020.

New leases signed during H2 2020 continued to include increased incentives for a typical 10-year lease, with overall incentive packages moving out by three months across all London submarkets. For example, incentives in the City were 24 months pre-COVID, but have since shifted to a maximum of 27 months. There is a lack of evidence to suggest that incentives have shifted out further than this.

Given there is such a varied level of lease lengths available on the market currently, medium to large occupiers are attempting to capitalise on this increase in incentives through leveraging their scale on deals on larger buildings and longer lease terms. Therefore, there has not been a large acceleration towards shortened lease lengths, particularly for larger space.

Landlords have also begun to offer a degree of flexibility in start dates for leases, increasing lead times between signing and move-in dates. This increase is obviously necessary given the coronavirus lockdown, but it has also broadened occupier options. Pre-COVID, a tenant would attempt to line up expiry on their existing space with the move-in date for new space, but this would limit what stock was available to the occupier.

This offer widens the window, and expands the cross-over, when space can be taken. From the landlord’s perspective, this has helped secure tenants in a difficult market and protect the future income profile of the asset.