A TALE OF TWO MARKETS
From a leasing low in Q1 to a high in Q2, the office leasing picture has been a mixed bag in 2024. This is true of where leasing has been the most active, with the City and West End office markets recording different paces of demand, the former seeing a significant rise in activity and usurping the West End both in terms of volume and number of transactions.
Unsurprisingly, the volume of space leased across the City is higher than the West End, on average 44% more in recent years (2021-23). Only periods of economic upheaval such as the Global Financial Crisis, EU referendum and the pandemic has seen that delta between the two narrow. However, in the first half of 2024, 2.9 million sq ft has been leased which is already double that recorded in the West End. Even the difference in the number of transactions, 350 versus 278, highlights the recent dip in West End activity, especially as it was 359 in H1 2022 and 333 in H1 2023. So, what is the breakdown of leasing activity in these two markets?
SIZE MATTERS
When we look at the data in more detail, we can see that leasing levels are very much led by the type of stock. The City and the West End have always each held their own distinct appeal for occupiers. The City is the home to towers, bulky offices and a corporate orientated culture, whereas the West End enjoys considerable prestige that comes from the historic town houses, the garden squares and an array of amenities. What we have seen is the return of the mega deal activity in the City, and conversely a reduction in the large deals across the West End.
In H1 2024, the City recorded three deals in excess of 100,000 sq ft with an additional six deals over 50,000 sq ft. On the other hand, the West End failed to generate any deals of these sizes with 93% of deals having been below 10,000 sq ft. For comparison, in H1 2023 we saw one mega deal and three deals over 50,000 sq ft complete in the West End.
Whilst office availability across the West End rose to 5.2 million sq ft in Q2, the highest since 2009, the choice of large spaces is limited with approximately 20 currently available over 50,000 sq ft. This list reduces when you layer on location, with just one in King’s Cross and Soho, as an example.
The City currently has the best capacity to satisfy larger requirements, with it having been the case at the end of Q2 that the average size of space available was 12,408 sq ft, compared to only 7,280 sq ft in the West End. There is over 3.7 million sq ft available that can accommodate requirements of 50,000 sq ft and above. It is no surprise that we are seeing firms with larger requirements look eastwards.
WEST END PREMIUM
The West End has been the darling of post-pandemic office leasing, fuelled by a relatively speedier return to the office by workers compared to other areas of central London which translated into a bounce back in leasing. Such is the demand that rental growth in this market notched up a gear, with Grade A rents across the 8 West End submarkets having risen by an average of 17% since Q1 2020. The steepest rise has come from Mayfair-St James’s where prime Grade A rents are now at £160.00 per sq ft, up 33% in the same period.
In fact, for 4 out of the 8 submarkets the Grade A rent level has surpassed £100.00 per sq ft. As a result, the average rent for a Grade A space in the West End is at £102.63 per sq ft.
Meanwhile in the City core, prime Grade A rents have risen at a comparatively more subdued pace, now at £85.00 per sq ft. There are also cheaper options on the fringes, that is apart from Clerkenwell-Farringdon where Grade A rents are now in the realms of West End pricing at £115.00 per sq ft.
Looking at Grade B prime rents in the City, spaces can be secured for a price 16% lower than for the same quality in the West End, which in itself widens the reach for occupiers.
SECOND HALF OF 2024
Early indications of leasing across the West End show signs that it will pick up in Q3, especially as we see a return of those large deals that have been lacking lately. However, whilst this will be welcome news to landlords, it will likely shift the market dynamics for occupiers. Tenants will be forced to compromise further as the availability of certain space types and sizes is squeezed, which in turn is expected to put greater pressure on rents.
On the flip side in the City, a healthy pipeline of development of new office spaces in the next 12 months and a significant level of vacant space will lessen any compromise for business looking in the EC postcodes.
In conclusion, availability of the right type of space has been both the driver and inhibitor of leasing activity in the first half of 2024. Landlords will look to respond to this disparity, and we should expect to see more refurbishment and development schemes kick off across the West End.
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