Office take up across the South East and Greater London markets increased 55% year-on-year during the first half of 2024, according to Knight Frank.
Occupiers have leased 1.79 million square feet across 132 transactions this year, compared to 1.15 million square feet for the same period in 2023. The market witnessed several large deals during the second quarter in new, best-in-class developments under construction.
The largest transaction in the second quarter was the government’s Atomic Weapons Establishment’s 67,280 square feet letting at Reading’s Green Park office campus. Reading recorded 204,543 square feet of lettings in the second quarter driven by a flurry of deals at its One Station Hill development, with Pepsi, PwC and NewFlex agreeing new leases totalling 112,355 square feet. Elsewhere, National Lottery operator Allwyn agreed to prelet 65,327 square feet at Regal Workspace’s Clarendon Works in Watford. All of the deals were revealed by CoStar News.
KF said the deals reflect a wider trend across the Thames Valley market involving global occupiers targeting new regional headquarters, with US pharmaceuticals giant Johnson & Johnson agreeing to take 97,000 square feet at Maidenhead’s Tempo development in March.
Take up of new and grade A offices has accounted for 83% of all letting transactions this year across the South East and Greater London. Future letting activity is expected to be driven by the 17.3 million square feet of lease events over the next five years, in addition to the 5.1 million square feet of active requirements across the region, KF says.
Debt costs, development inflation and planning uncertainty means that demand for new grade A offices is expected to continue outstripping supply. There is 3.6 million square feet of office space under construction, with 27% let.
Investment market
The South East and Greater London markets recorded £782 million of investment transactions during the first six months of the year, a 115% increase compared to the second half of 2023, which recorded £363 million of deals. KF says this is reflective of sentiment beginning to improve, with the second quarter of the year recording three transactions valued higher than £50 million. In comparison, there were only three deals within this ticket size over the entirety of 2023. The £52 million acquisition of Assembly London in Hammersmith by a private Middle East investor is the largest transacted so far in 2024.
Prime office yields have stabilised at 7%, making deals increasingly debt accretive, KF says. Recent transactions supporting this thesis include Brydell’s £21 million acquisition of North Bailey House in Oxford, which exchanged at 6.85% and the £20.5 million sale of St Alban’s 10 Bricket Road at a net initial yield of 7.25%.
Roddy Abram, Head of South East & Greater London Offices, said in a statement: “Companies of all sizes are upgrading their office footprints to newly constructed buildings in locations offering premium amenities, often favouring those with good connectivity to London via public transport. Reading has been a magnet for TMT, healthcare and financial services firms in recent years, with 334 companies employing 1.2 million people based in the city. Grade A office availability in town centre locations across the region continues to be constrained, with upcoming lease events intensifying competition for space.”
Simon Rickards, Head of National Offices Capital Markets, said: “Although there are pots of active capital looking to deploy into attractively priced office assets, the absence of any rate cut has held back bigger ticket transactions. However, with macroeconomic conditions showing early signs of improvement, political certainty and inflation back down to 2%, there is growing conviction amongst buyers that the prime end of the market has already bottomed out. This is evidenced by recently concluded deals, with liquidity beginning to re-enter the market for prime assets in the best locations with a strong income return profile. Value erosion is likely to continue for secondary and tertiary assets, with weak occupier retention qualities, that don’t have a viable repositioning option.”
Speaking to CoStar News Abram said the year has kicked off in a far more positive vein than last year. "Across the half year it looks encouraging, with the stand out the three buildings Station Hill, Tempo and Clarendon Works.
"They are exemplar developments and have delivered strong corporate names and moved the rental tone upwards, broadly setting the new tone of where headline rents are. They fall into three of our nine 'momentum' markets in the South East and it looks good for the rest of the year. We calculate there is 850,000 square feet under offer.
"The ultimate driver is the lease event but there is greater confidence as some uncertain factors settle. What is standing in the way is the capex exposure to occupiers of moving. "
Rickards said: "For investment I felt the final quarter was the bottom of the market at least in terms of sentiment. We have been on a low trajectory and are getting back up to where we want to get to. Deals take a long time and are a lot more complex as a lot are for alternative use."