London’s commercial property market entered 2020 with forecasted supply constraints and substantial rental growth. During the initial weeks of Q1, the market moved as anticipated.
Take-up levels were off to a slow start of the year, which translated into above-average availability. Average vacancy rates in Central London neared 4%, but they increased to 10% in East London. Office take-up in the West End and the Tech Belt remained stable. The business services sector was behind most transactions, accounting for approximately a third of all deals during Q1. Other key occupiers were banking, finance, technology, and creative.
The largest deal of the quarter involved offices in the EC2 postcode, although overall, the City of London remained the most sought-after destination. Outside of the City, Hammersmith and White City commanded the largest number of enquiries.
Headline rents for prime space were overall stable early in the quarter, and averaged £80 / square foot city-wide. There were no changes in the list of most expensive sub-markets (St James, Mayfair, Soho, Chelsea, and City Tower). Areas that experienced slight price increases included Victoria and Covent Garden. The location of the most affordable sub-markets also remained unchanged, with the most affordable offices being in Canary Wharf, Docklands, and Stratford.
Retail & Industrial
Rental values for retail space were consistent with the previous quarter data. Oxford Street and Bond Street still commanded the highest retail rents at £2,400 / square foot and £850 / square foot respectively. However, by the end of the quarter this sub-market was struggling due to lockdown measures, which exacerbated the signs of fragility evidenced during 2019.
The industrial property market was the most stable of all commercial real estate in London. The best performers were warehousing and distribution centres, which were boosted by the rise of online shopping during lockdown. During this quarter, there was an increase in short-term requirements, especially in the most in-demand locations: Barking, Wimbledon, Battersea, and Dartford. Average rates were £16 / square foot / year.
Impact Of Covid-19 On London’s Commercial Property Market
Later in the quarter, the London office market was the first to experience the pandemic’s repercussions. The main theme was a generalised slowdown in activity and changes to office layout and occupancy levels once some sectors started to operate again.
Pressure on landlords to increase rent holidays and rent-free periods increased mid-quarter due to liquidity issues. Moreover, there was a surge in demand and enquiries for East London offices, as many tenants considered relocating to lower priced premises.
Flexible offices felt the impact of the pandemic strongly, but as we moved further into the quarter, flexible and serviced offices partly regained their appeal as a short-term solution to changing space requirements.
The retail sub-market fared worse than offices, and saw a sharp double-digit decline in footfall during lockdown, as well as headline rent declines of almost 9%. The worst hit retailers were those providing leisure, health, and wellness services. On the other hand, the industrial sub-market fared reasonably well, since physical distancing measures in warehouses and fulfilment centres led to increased enquiries for additional space.
Overall, Covid-19 seems to accelerated the trends already present in the city’s property market, although the pandemic’s full effect will not be evident until later in the year.