Take-up of office space in the City of London rose for the second consecutive year in 2013, with the total level of leasing activity for the year reaching just over seven million square feet.

This was 53% higher than 2012's total, and 46% above the long term average. Indeed, 2013 was the strongest year for the City leasing market since 2000.

The main reason for this strong recovery in take-up the return of larger requirements to the market. 2011 and 2012 were characterised by very low levels of lettings of 50,000 sq ft and above. Indeed, 2011 saw the lowest level of large unit demand in the last 20 years.

2013 however was clearly the year that confidence returned to the City's larger businesses, and this led to a 113% rise in the volume of lettings of 50,000 sq ft and above. This was driven not only by traditional City-type businesses, but also by tenants who historically might have chosen the West End.

It is clear that the structure of demand for City of London office space has changed during the global financial crisis. The Banking sector, which accounted for 10% of take-up in 2006, only accounted for 1% of take-up in 2013. Insurance and Financial Services remain a stalwart of the City occupier market, driven by insurers in particular in 2013, but it was the Technology and Creative sectors that continued to outperform their historic trends in this market. While these two sectors only accounted for 8% of the space leased in the City of London in 2006, this rose to 27% of take-up in 2013. Deals such as Amazon's acquisition of 60 London are typical of this new more footloose occupier who had been attracted to the City both by the cheaper rents than in the West End, and the emerging technology corridor to the north of Holborn and London Wall.

The strong recovery in take-up in 2013 led to a corresponding sharp fall in availability in the City. The vacancy rate fell from 10.4% at the end of the second quarter of 2013, to 8.3% at the end of the year. This means that the total amount of available office space at the end of 2013 was 6.76m sq ft, which is less than the total take-up in 2013.

Rents

Top rents in the City remained broadly stable during the second half of 2013, oscillating around the £70/sq ft at the City's three new tower buildings. However, it was the rather more representative average prime rent that showed a dramatic recovery last year, rising by 20% over the 12 months to £64.45/sq ft.

This is the kind of growth rate that we would normally expect to see early on in a City market recovery, and while there is no chance that this rate will be sustained, it is a clear sign that the supply/demand balance is tilting firmly in favour of the landlord.

Another indicator of rising tenant concern about localised shortages of Grade A space is the recent trend in the length of leases being signed in the City. 2013 saw the largest number of leases of 15 years or more signed in the City since 2006. Indeed, our records show that 66% of all the leases signed last year in the City of London were for ten or more years, which is the direct opposite of the trends that are being seen outside London.

The longer leases and rise in pre-letting might both be reasons why net-effective rents have not risen as much as headline rents over the last 12 months. Previous market cycles have tended to see net-effective rents rising before headline, but this time around the typical 24 months rent free on a ten year lease has remained stable. This means that the gap between prime headline and net-effective rents has remained stubbornly wide, at around 20%.

Development

The major challenge facing the continued recovery of City rents in 2014 is the state of the development pipeline. While there is by no means a development boom underway, there are 4.7m sq ft of developments and refurbishments due to complete in 2014. While this might sound like a large number, even in the context of 2013's strong take-up, the devil is as always in the detail. First of all only half of this space is made up of new developments, the rest being small to medium-sized refurbs. Secondly, just over one third of the space is already pre-let. Finally, even if some of this space doesn't let up fast, 2015 is only scheduled to see 2.9m sq ft of completions.

Taken from
Review and Outlook: Central London Offices - February 2014