London's Office Rental Market - 2020

The London office market ended 2019 on a positive note, pointing towards stability and recovery after months of uncertainty brought about the political situation. By December 2019, activity levels were high, with 12 million square feet under construction and unusually high pre-letting activity (1).

Market analysts initially expected the positive trend to continue into 2020 (2). Their original forecast contemplated a surge in construction, sustained rental growth, a stable leasing volume, and a drop in vacancy rates. Other themes set to dominate the market included:
- A rise in office take-up rates in East London, given the area's ability to accommodate larger space requirements at competitive rates.
- Stable activity and ongoing demand in the City, boosted by possible trade agreements between the UK and non-EU countries, which made London an appealing choice for investors (3).
- A growing price divergence between Grade A and B offices in prime London sub-markets like the West End.
- Intensified demand for serviced offices with a focus on quality and for those with a diversified offer that appeals a wider occupier range.

Trends Revisited Following Covid-19

Although the city's office market was initially set to strengthen during 2020, the pandemic put a damper on growth forecasts. A few weeks into the pandemic, and two thirds of all London office transactions were on track or under review, while the remaining were likely to falter. Instability and liquidity issues became the dominant themes in the market early in the year, although large occupiers were not as affected as SMEs (4, 5).

A sentiment update for Central London identified additional trends likely to persist throughout 2020: delays in the delivery of new offices, stalled construction and deal execution levels, and an increase in grey or tenant space going into the second half of the year. Although pre-let numbers were high before the pandemic, this could mean that occupiers who cannot wait may need to seek alternative locations (6).

Moreover, although the initial predictions involved the growth of office-based employment, the revised forecast suggests job losses similar to those experienced during the 2008 crisis, which may lead to a 45% decline in year-on-year office take-up (7).

However, there is some continuity in trends that had been gaining traction in previous years:

- Flexibility remains a key requirement post-lockdown. This will be most evident in how landlords and tenants handle hardship, and we're likely to see increased pressure on landlords to offer arrangements like rental holidays, short-term rental discounts, or additional rent-free periods.

- Space-as-a-service will become increasingly appealing to meet needs in crisis and post-crisis periods, although operators will need to think beyond the coworking model (8).

- A flight to quality, as best-in-class office space is set to drive demand for the rest of year (9).

- Health and well-being in the office, with an emphasis on return-to-work arrangements and on physical distancing requirements. This may become a challenge in terms of space distribution and overall workspace strategy. In order to offer a healthy environment, many office occupiers will consider downsizing (10).

- Growth of the digital sector. In London, this industry is expected to account for more than 13% of the city's total output this year, fuelling demand for space and becoming a pillar of the office market. This will be most evident in city fringe locations and in campus-style offices (11, 12).

Despite the pandemic's effects, London continues to rank high as a global office destination with strong market fundamentals. Looking ahead, a rebound seems likely towards the end of the year, although full market recovery may extend into 2021.