Following the slowdown of the London’s commercial real estate market due to onset of the Covid-19 pandemic, activity levels have resumed during Q2, although cautiously. Transactions proceeded very slowly over the past three months, since fewer lenders are active and most tenants are on a wait-and-see mode. As a result, only a handful of transactions took place between April and June.
According to market analysts, it is still too early to quantify the true impact of the pandemic on commercial real estate, but the following observations ring true for the city:
- Office relocations and downsizing are the main themes. Square footage requirements are 35% down compared to pre-crisis levels.
- There are fewer enquiries since many office-based businesses are still assessing their occupancy strategy.
- Occupational demand is likely to continue dwindling as remote work becomes more widely adopted in the months to come.
- There has been a slight decrease in rent holiday requests compared to Q1.
- Trading volumes may not recover until Q4 2021, so the real estate market may not resume at full speed until then.
Q1 ended with a sharp decline in demand for office space in London. All sub-markets were affected, including the most resilient, such as the West End. During Q2, the majority of offers and enquiries were limited to the City. All other sub-markets experienced negative take up rates.
Prices remained steady for Grade A offices and those in the most sought-after locations. Some anticipated a drop in headline rents, but construction pipeline delays meant that the availability of new office premises was limited, which exacerbated existing shortages. This factor was the main contributor to keeping headline rents stable despite the uncertain economic situation.
On the other hand, there was a marked divergence between office space classes. There’s a growing supply of second hand space in the city, which is likely to increase in the future as tenants move out or downsize in the coming months. Vacancy rates for Grade B space increased across all sub-markets.
Overall, the future performance of the office sector hinges on the crisis duration, since analysts agree that the market will not be severely affected if disruption is limited to two quarters.
Retail & Industrial Markets
The retail property market only started to resume activity in early June. On the whole and except for grocery retailers, this sector is still operating on minimal cash flow, as in-store retail sales dropped by almost 20% in April.
For the real estate market, this suggests that a significant amount of space may be soon released back into the market, as retailers with multiple locations reassess which venues comply best with new safety requirements. Rent concession requests are also set to increase if tenants are not able to meet their financial obligations. A rise in rent arrears is already a reality in the city’s retail market.
Prime rents are expected to drop nationwide, although London may be an exception, being a major retail hub. However, some prime retail spots like Bond Street are already experiencing a decline in rental values.
As for the industrial market, warehouse space has fared better during this quarter. This is due to a surge in online shopping and to the subsequent increase in storage requirements. Short-term space enquiries are on the rise in industrial areas around the city, although deals are taking some time to materialise.
In conclusion, the city’s commercial property market is still adapting, and at different speeds depending on the sub-sector. A full picture of the state of the market isn’t likely to emerge until later in the year, when the majority of businesses reopen and assess their workplace readiness in a post-lockdown scenario.