Central London prime office rental guidance should be lifted by £10 per square foot across the board, to £150 in the West End, £80 in Midtown and £87.50 in the City, in response to a booming increase in demand, Knight Frank said today.

Unveiling its annual analysis of the London market at the Nobu hotel on Portman Square, KF said central London office requirements were at a 10-year high at 12 million square feet. Eighty percent of the companies on the hunt seeking to increase the space they occupied. The figure is 34% up on this time last year.

KF says 40 of the requirements it is tracking are for more than 50,000 square feet. CoStar News has tracked major new occupier requirements in the City here.

In response, KF is forecasting office take-up in London to increase 12% year-on-year to hit 12 million square feet in 2024, driven by high active requirements, lease expiries and competition to secure new or refurbished office space.

The global property consultancy’s 2024 London Series has analysed net absorption trends for large leasing deals – higher than 20,000 square feet – since 2021. Crucially the results find a large proportion of companies sought to expand, rather than reduce, the amount of office they occupy. Overall, the transactions show a net increase of 1.1 million square feet in the amount of space occupiers have leased compared with their previous occupancy, something Lee Elliott, head of global occupier research at Knight Frank, said flew in the face of widespread "negative reports".

Knight Frank’s data also sees London’s prime office rents continuing to rise, while vacancy is tight for best-in-class buildings.

The City of London has seen 25 leasing deals at prices exceeding £90 per square foot over the past two years, compared with just six in the preceding four years. The West End has seen 142 deals over £100 per square foot in the previous 24 months, compared to 112 in the four prior years, KF points out.

Abby Brown, partner in the London Office leasing team, said prime rents had adjusted to include sustainability measures, outdoor space and other elements. As such Brown said a "change of approach" to prime rental guidance is also needed in the market and KF has lifted its guidance from £77.50 to £87.50 per square feet for the City, from £140 to £150 per square footfor the West End and £70 to £80 per square foot in Midtown.

Dan Gaunt, partner and co-head of London office leasing, added that "fresh thought" and data was now needed on the London market in the face of restricted choice and the "evolution of prime rents".

KF says to reflect the evolving dynamics of the market in terms of rental levels, it has also reviewed and improved its usual basket of prime transactions to reflect new criteria. These are: minimum floorspace of 10,000 square feet inclusive of lettings of terrace floors and in low to mid-levels of towers; industry-leading sustainability metrics; accessibility to open spaces, both communal and private; comprehensive amenities/facilities promoting employee well-being; and within five minutes walking time of a mainline station and multiple transport options.

Total office take-up for 2023 finished at 10.7 million square feet against a long-term average of 12 million square feet. Richard Proctor, head of London tenant representation, pointed out that last year's figures had been bolstered by a strong final quarter. "Occupiers are changing not evaporating," he added.

Lee Elliott said the "blinkers of COVID-19 were clearly being removed" with 55% of occupiers it has recently surveyed globally looking to increase their global footprint over the next three years.

The last three months of 2023 recorded 3.9 million square feet of leasing transactions, representing the strongest quarterly take-up volume for five years. In addition, new and refurbished take-up was 2.6 million square feet and represented the largest level of prime take-up since 2004.

The positive figures are leading Knight Frank to forecast office take-up in 2024 will hit 12 million square feet for 2024, 12% higher than last year, driven by higher levels of active requirements, forthcoming lease breaks and a further move to newer, better quality offices.

Deals will also be fuelled by leases ending or reaching break clauses, across 28.3 million square feet of office space in London between now and 2026, as more companies secure future workspace requirements earlier due to the lack of new office schemes being delivered. KF expects a major increase in regears to continue.

KF says this is being exacerbated by less than half of the available space in 16 of the 21 London office submarkets qualifying as new or refurbished space. The City saw take-up of new or refurbished space in 2023 account for 75% of transactions, while this figure as 53% in the West End.

By KF's estimates the development pipeline falls well short of meeting average levels of new and refurbished take-up, with consented schemes that have a 50% to 75% probability of being delivered only adding a further 2.7 million square feet.

The brokerage believes that the construction pipeline completing by 2026 is 5.3 million square feet below average levels of take-up of new and refurbished space across that period. This shortfall is particularly acute for spaces over 40,000 square feet, which will result in rental growth for space attracting large occupier deals.

Philip Hobley, head of London Offices at Knight Frank, said: "The future pipeline cannot satisfy ongoing demand, even at current levels, which is something we haven’t witnessed in previous similar recovery cycles through macroeconomic turbulence. These structural trends should continue to support London’s recovery, particularly in the investment market, with stabilising interest rates making prime office yields more debt accretive.”

Investment-wise Nick Braybrook, head of London office capital markets and development, said central London office transactions had fallen to £6.9 billion in 2023, a low last seen in the aftermath of the Lehman Brothers collapse. But he said the year would see recovery driven by "price discovery, recovery capital, and performance outlook".

Victoria Ormond, head of capital markets research, said critical is that 2024 will see a peak in loan maturitie, at £6.34 billion, particularly for acquisition financing in the capital.

Braybrook said private buyers will lead the recovery, having accounted for 53% of acquisitions last year but added that real estate investment trust, Japanese and Middle Eastern investors were all likely to be strong participants, while KF's residential land clients were increasingly looking to diversify exposure to London via commercial acquisitions.

It reports that UK REITs are outpacing private equity in seizing market opportunities having already invested £1.5 billion in 2023 into the London commercial market versus £500 million for private equity.

KF says sovereign wealth funds, traditionally slower to return to markets as they require greater evidence and due diligence, are expected to show "renewed interest in liquid, gateway cities such as London, later in the year".

Abigail Heyworth, partner in Knight Frank's residential team, said that on the face of it London's large swathe of secondary offices ought to be a panacea for the capital's lack of supply of residential stock but added that some times repurposing and conversion to homes was like "fitting a square peg into a very round hole".

Yazmin Murat, partner in the prime central London developments team, said at the high end there were increasingly clear examples of office redevelopments as residential paying huge dividends including the 90% sold redevelopment of Centre Point at an average of £3,000 per square feet and the penthouse at the redevelopment of the Old War Office selling for £50 million or £10,000 per square foot.

At the "more traditional" end of the market the opportunity was less obvious but it was there. "There is no single solution," Heyworth said.

In another indicator of Knight Frank's positivity about the market, Stephen Clifton, head of Knight Frank's UK commercial business, said he was confident that the adviser would return next year to serving not just one but two sausages at the breakfast, which is celebrating its 25th anniversary.