The message from the panel at the London Property Alliance this week was very clear: 2021 was the year of rebound after a relatively muted performance in 2020 due to the global pandemic. In their Investment & Market Analysis webinar, experts from the City, the West End and London residential sectors were unanimous in their cautious optimism for what 2022 could bring for real estate investors.
Alexander Jan from the London Property Alliance drew attention to the recent Global Cities survey which compares London against its global rivals New York, Paris, Hong Kong and Berlin by a series of benchmarks from the economy to office vacancy rates and rent levels to transport. While New York appears to have suffered disproportionately from the effects of the global pandemic, London has recovered in a number of key areas such as office rents increasing and vacancy rates beginning to decrease. This is, however, against a backdrop of wider macro economic challenges such public borrowing being at its highest level as a percentage of GDP since 1963 and social changes that have been accelerated by the pandemic such as increased working from home.
This optimistic sense of a strong recovery for London was echoed by JLL’s Chris Valentine who described the recovery of the West End commercial real estate market as “robust”. The annual take up of leased commercial property in the West End at the end of Q4 of 2021 was 3.8million square foot compared to a 10 year average of 3.5million square foot. While vacancy rates have crept up to 6.4%, there has still been a quarterly investment volume in Q4 for 2021 of £2.6 billion sitting against a 10 year average of £1.4billion, showing a very strong performance in the West End. The average rental growth for the period 2021 to 2025 is predicted to be 2.1% for prime assets and 1% for Grade A. Chris also felt that the future looks very bright for West End office space with above average levels of space under offer suggesting sustained momentum into 2022 and vacancy rates falling for the third consecutive quarter.
A similar buoyant story could be told in the City according to Knight Frank’s Dan Gaunt whose view was also that the recovery gathered pace in the later quarters of 2021, evidenced by the highest take up in City office space in Q4 2021 (1.8 million square feet of space) since Q3 2019. That take up in 2021 was double that of 2020 and there was a 66% increase in take up in Q4 v Q3 of 2021, suggesting a strong momentum behind the sector coming into Q1 of 2022. Dan was keen to point out that a lot of this increase in space was driven by a collection of large spaces being taken, such as 270,000 square feet being taken at 1-2 Broadgate by Allen & Overy and 415,981 square foot being taken at 2 & 3 Bankside sub-let to Omnicom (upon which Macfarlanes had the pleasure of acting). Also the tech giant companies are now entering the City market such as Apple taking 78,000 square foot at 22 Bishopsgate and Tik Tok putting out a recent active requirement for 100,000 square feet of space.
Both JLL and Knight Frank seemed confident that the current vacancy rates in the West End and City will continue their downward trajectory based on tenant requirements and pressure on the development pipeline. Both agencies also agreed that the focus for tenants seeking to make global London the base for their business is increasingly on three things: sustainability, connectivity and amenities for staff. Businesses are feeling the increasing pressure to show they are meeting their sustainability targets and, perhaps of greatest pertinence in January 2022 as Londoners return to the office, to show they are making the office the preferable place to do business for their employees. Developments and “best in class” refurbishments that can genuinely meet these requirements can demand top rents, giving further confidence to industry investors as we enter 2022.