The West End office market on the up | Freddie Corlett

The West End office market on the up

The West End market defies expectations as occupiers continue to clamor for the best office space, says Freddie Corlett

Those who don’t know London’s West End office market may have looked at the ongoing debate about hybrid working and workers’ being slow to relinquish working from home, then the UK’s pessimistic economic outlook, and assumed that H1 2022 would have seen a disappointing number of occupiers signing up to take office space.

In fact, the market has experienced almost the exact opposite. Firstly, occupancy figures show the West End is leading the way in terms of workers returning to the office, with peak periods of the week now regularly recording occupancy of over 40 per cent (in the City, meanwhile, it’s about 35 per cent). Secondly, the volumes of space being taken belie notions that West End occupiers are looking to put their office requirements on hold any time soon.

By the end of H1 take-up had reached 2.17 million sq. ft across 187 transactions - 13 per cent above the 10-year long-term average and 68 per cent higher than at the same point in 2021. June 2022 alone was the third busiest month Savills has ever recorded for the West End with 1 million sq. ft of transactions completing across 40 deals, including Capital International’s pre-let of 220,000 sq. ft across the 8th to 16th floors at the Sellar Group’s Paddington Square development, W2, and the much-anticipated completion of MSD’s acquisition of Belgrove House, WC1, to form its new 195,000 sq. ft UK HQ and Discovery Centre. As a result, the West End core vacancy rate has moved in by 80 basis points, from 6.7 per cent at the end of 2021 to 5.9 per cent at the end of H1 2022.

The Financial Services sector led the charge in taking space, accounting for 32 per cent of West End offices let so far this year. Drilling further down into this group of occupiers, it’s clear that Private Equity, Asset Management and Investment Management firms were the most acquisitive sub-sectors, continuing a trend evident since 2021 and reinforcing another theme we’ve been noting (not just in the West End but across most office markets): the rush to acquire top quality space with high ‘green’ credentials in response to strengthening ESG requirements and rising employee expectations continues. 89 per cent of West End take-up to the end of H1 2022 was of Grade A quality offices, although in June, Grade A transactions accounted for an enormous 98 per cent of space taken in terms of square footage. As a result, the supply of prime and Grade A office space in the West End is dwindling – particularly in the core sub-markets of Mayfair, St James's, Covent Garden, Soho and North of Oxford Street West and East.

Even with several new buildings coming to the market over 2022, the supply of Grade A offices is currently 13 per cent down on the end of 2021, as much of this new space was already pre-let and the rest has been eagerly snapped up. With material and labour cost inflation pushing back the timelines on many future office development and refurbishment projects, competition for the best space is only set to intensify.

At the same time, the amount of ‘grey’ or ‘tenant-controlled’ space in the West End market (office space that tenants are looking to sub-let), after surging at the height of the pandemic when firms were uncertain about their future requirements, has declined. Some has been let and a similar proportion withdrawn after occupiers decided they did require the space after all. West End grey space levels are now 1.3 million sq. ft compared to 3 million sq. ft at their peak in April 2021. This all means that West End rents at the top end of the market are only heading in one direction over the short and medium term: up. By the end of H1, the average West End prime rent stood at £119.38 per sq. ft, a 6.6 per cent rise from the end of 2020, and the average Grade A rent was £84.37 per sq. ft, an increase of 2.5 per cent from the end of 2021. While the speed of increases may slow as the wider macro-economic climate plays on occupiers’ minds, the demand/supply imbalance is unlikely to lead to any sudden adjustment in rents for spaces that deliver on the ‘prime and green’ strategy favoured by most occupiers.

As a consequence of occupiers being willing to pay higher rents for best-in-class space, there has been lessening demand for Grade B offices (spaces which have not been recently refurbished and don’t quite meet occupiers’ current high expectations). This caused Grade B rents to fall 6.7 per cent between the end of 2021 and June 2022 to £51.31 per sq. ft. There is the potential for many of these offices to be refurbished and new amenity spaces added to attract occupiers and thereby justify higher rents. This will come at a cost given the aforementioned inflationary pressures on materials and labour, but with thoughtful planning and design there is the potential to make many of the spaces currently considered Grade B attractive to businesses. There are other ways of rising above the Grade A/B classification too: the new Class E planning use provides landlords with the opportunity to add different uses into a building, thereby creating more of the community which occupiers crave for their culture and staff retention.

The future of London’s West End market is not without challenges, but given the current dynamics, and the figures we’re recording so far in 2022, it is in a strong position to withstand any bumps in the road ahead and remain one of the UK’s most popular office locations. n

Freddie Corlett is a Director in Savills West End office agency team