As London and the wider economy learns to live with Covid, the office market and occupier sentiment takes on a more positive outlook. As such we have seen the following changes over the recent past:
- Uptick in leasing activity by and large manifested itself in tandem with the Government Covid vaccination programme which has boosted confidence.
- A two-tier market has evolved with a Flight to Quality – Tenants increasingly favour new, refitted and good quality refurbished Grade A office space over lower cost, lower grade accommodation.
- Letting activity has been dominated by new and refitted Grade A Space.
- Rents for Grade A space show little signs of declining in contrast to poorer space where there is more availability and little appetite to transact.
- Increase in the need to provide vibrant, attractive, high quality, Covid safe work environment that promotes return to working initiatives and productivity.
- Workspace that is focused on wellness and wellbeing is now coming into play as this underpins recruitment, retention and productivity.
Such wellness features include:
- Greater collaboration space
- Terraces, balconies, winter gardens, outdoor space where workforce can break away from the intensity of their computer screen and clear their head
- Bike racks
- Shower facilities
- Better ventilation – emphasis is on fresh air supply rather than air-conditioned air
- Improved Fenestration leading to more natural light
- Inclusion of biophilia – the interaction of workforce with plantation is linked to increase in wellbeing and productivity.
- Increase in desire from businesses to operate from Low Energy, Low Carbon footprint accommodation to meet their stated Environmental, Social and Governance Objectives.
- Occupiers have used break options and lease expiries to downsize but upscale on the accommodation their take.
- Rents for new and refitted Grade A space remain broadly at pre-pandemic levels.
- Rent frees have been pushed out although this largely depends on the owner and whether the space is fitted or not fitted. Not fitted space – 5-year term – Rent Free between 9-12 months. Fitted Space on same lease length – 5-7 months’ rent free.
- Lease Length – continued drive towards greater flexibility – shorter lease terms – 5 year with breaks at 3, seen 3-year terms with break at 2, Agreed 10-year lease with breaks at 3,5 and 7.
- Total Cost of Occupation – occupiers are now considering this more than ever when developing their real estate strategy. Its not just about rent but also service charge (and the likelihood of this increasing) and business rates. For those downsizing, more often than not they want to see tangible savings in their real estate exposure.
The above provide an insightful overview of how the market is coming to terms with events over the last 18 months and is likely to form the basis upon which recovery can be achieved.
Potential concerns that need to be considered:
- Corporate distress following the end of the Government assistance programmes – which have allowed companies to service their costs on reduced operational revenue. Will these companies now be able to operate? This could lead to more second-hand space coming to the market.
- Renewed shutdown of economic activity if infection and hospitalization rates rise from Covid variants; albeit we see this as a lower risk due to Governments roll out of the vaccination program.
If you are interested in letting your office space anywhere in London, do not hesitate to contact a member of our dedicated Commercial Lettings Team: