South East Office Review Q3 2021
Q3 2021 data indicates that the South East prime office market is seeing a strong recovery following the height of the pandemic, with 2021 set to be the third largest year of the last decade for investment, and office take up in the South East up 78% on Q3 2020.
Hugh White, Head of National Office Investment, comments:
“Investment in the South East office market is up 71% YTD, with 2021 forecast to be the third largest year in the last decade.
The third quarter of 2021 has seen office investment in the South East rise by 61% compared with the same period in 2020, with more to come in Q4. It’s fast becoming the year of the office and we expect 2021 to be the third busiest year in the last decade. For real estate investors it is more crucial than ever to understand which industries are growing and hence will require more space and conversely which are contracting – landlords must become occupier type focused rather than simply sector focused. The role of the office is changing too and investors need to provide increased levels of flexibility and specification for current and future occupiers.
The K shaped recovery continues and at the value add/opportunistic end, generous yields and potential growth are reasons why the UK is such an appealing market for private equity and overseas investors. The focus on growth employment industries which are driven by the UK’s established Centres of Excellence, at the forefront of which are Oxford and Cambridge, has led to locations such as Stevenage and Gloucester now being considered by international investors who just five years ago would have been hard pushed to find them on a map.
Importantly real rental growth has returned to the UK’s office market. Prime rents in four towns in the South East have already reached or exceeded £45psf with further towns to follow.
Investors who follow the jobs and ensure that their buildings are fit for the modern occupier will be handsomely rewarded.”
Ed Smith, Head of National Office Agency, comments:
“Our Q3 data shows that the prime office market is seeing a strong recovery after a challenging period during the height of the pandemic. The South East data is a microcosm of what we are witnessing around the country. And the statistics are startling. Office take up in the South East is up 78% in Q3 2021 compared to the same period last year. Now clearly the pandemic meant a significantly reduced level of take up last year with a drop from a quarter average over the past decade of 728,000 sq ft to 410,000 sq ft. But 2021 has rebounded strongly. Indeed, while in the whole of 2020 take up totalled 1.6m sq ft, we have already seen that rise to 2.1m in 2021. And that’s only the first three quarters.
These numbers are driven by growing demand across multiple business sectors, with some significant movers including Canon at Heathrow, Kimberley Clarke in Leatherhead and Vaccitech in Crawley. Notably, it is not just focused around prime locations. We are also tracking business parks and out of town locations attracting a significant number of occupiers, now accounting for 56% of transactions within the office market.
Demand for space is unsurprisingly therefore, increasing: identified demand stands at 3.35m sq ft at the end of Q3, of which 624,000 is under offer. We expect the year to finish circa 3m sq ft, ahead of both the five and ten year average, and ahead of the previous two years. Businesses now are focused on securing the best quality space they can for their business, with 84% opting from Grade A space or new buildings. As a result, this has also driven up demand for Grade B properties amongst occupiers that are being priced out by the competition for top quality stock. A continued focus on Grade A office space may also drive the need for retrofitting and renovation of old stock in order to bring it up to standard and attract occupiers.
Vacancy rates remain low, at an average 8%, lower in fact than any period between Q1 2018 and Q1 2020. Given pipeline new developments and refurbishments are somewhat limited, with only 500,000 sq ft due for completion in the next two years, it’s likely that vacancy rates will drop further. Perhaps surprisingly, what we haven’t seen however, is occupiers releasing space to the market as a result of more agile working practices. Rather than taking that course of action, business are instead embracing the use of space in a more innovative and different way.
Despite the naysayers, the office remains central to employer plans and the demand for space that truly fits occupier needs is only growing so 2022 should be a busy year.”