London's Office Rental Market - Trends for 2021

The London office market faced challenging conditions during 2020. Some of the challenges were a continuation of trends that had been unfolding for years, such as Brexit-related uncertainty and the strong growth of new office accommodation models, including co-working and hybrid spaces. However, the predominant theme in the city's office rental market throughout 2020 was the effect of the COVID-19 pandemic on real estate.

The sudden need for remote work had a severe impact on take-up rates and forced many businesses to contemplate a new real estate strategy which, in many cases, involved dropping assets or not renewing leases. At the end of 2020, take-up rates sat at nearly 50% below trend. Low take-up rates have a direct or indirect bearing on the office market forecasts, which we will now examine in detail.

Rental rate volatility

Rental rates in the London office market held up relatively unscathed last year, but during the first half of 2021 we are likely to see strong downward pressure on office rental rates. In some areas, the drops may reach double digits. The exception to these drops is headline rents and rates for trophy space, which are unlikely to experience significant changes beyond those anticipated due to inventory shortages.

Increased vacancy rates

Vacancy rates already rose by a combined 30% during 2020. City Fringe sub-markets were particularly affected, with some areas seeing the amount of vacant space double. Forecasts suggest that average vacancy rates may hit a 10-year high of 10%, although they may correct to 7% later in the year. In any case, these percentages are still below the figures seen during the financial crisis.

Quality space shortages

Many new office developments and construction projects have been put on hold or delayed due to pandemic-related restrictions, which will only add to the already tight supply of Grade A office space in the city. While activity in general is sluggish, demand for best-in-class offices in London remains relatively steady and top-quality spaces are snapped up fast.

Sublets on the rise

Uncertainty still looms in the horizon, and for many office-based business owners this means that now is not the best time to expand or commit to new office leases. As a result, sublets are expected to be on the rise across the city. According to a recent report, sublet rates are already 75% higher than the previous year.

Changes in working practices

Lower occupational density and space efficiency in city offices are here to stay, at least during 2021. The measures taken to comply with pandemic-related health and safety regulations have translated into very different tenant requirements, affecting average office size and layout. Some forecasts suggest a reduction in office size requirements of between 10 and 15%. The recovery of London's office rental market will be drastically impacted by the measures that these companies decide to take long-term, with recent reports indicating that 74% of financial services companies have been examining their office requirements to see space can be used more efficiently or reduced totally.

In addition to this, pent-up demand could peak towards the end of the year, although this is subject to the general state of the economy and to whether more total or partial lockdowns are imposed.

Another factor that could also play an important role in market recovery is how quickly flexible space providers can adapt to new health and safety rules. Flexibility is as valuable as ever, especially considering that lease agreements are likely to become shorter due to continued uncertainty. A recent CBRE survey suggests that up to 70% of employers are willing to leave remote work in place, so demand for adequate space may surge accordingly.

Ultimately, the consensus seems to be that the UK economy will not return to pre-pandemic levels any sooner than 2022, so it is safe to expect that growth indicators in the capital's rental market will emerge at around the same time.