Top 5 Trends for London Offices in 2023

Posted by Colliers on 13th February 2023 -

Once again, we’ve started the year against a backdrop of economic uncertainty and another interest rate rise. 2023 looks set to provide challenges for the London offices market, but with that said, there are reasons to be optimistic, and opportunities remain.

Below, we set out the anticipated trends for the year ahead:

1. Shorter lease lengths

We have seen the average term certain across central London drop below five years for the first time. In 2019, it stood at 5.4 years, whereas at the end of 2022 this had fallen to 4.9 years. Whilst this shortening of leasing commitments is not a new trend, this milestone underlines the continued demand for flexibility from central London office occupiers. 

Looking beyond the headline, however, there are some interesting sub-trends in the data:
- The average term certain in the wider City market (including the City Fringe) is 4.7 years, compared to 5.0 years in the West End.
- Flexible workspace providers and the legal sector sign for the longest commitments, on average, (8.3 years and 7.1 years respectively.)
- Unsurprisingly, the average term certain depends on the size of the transaction: sub-2,500 sq ft transactions produce an average of just 3.2 years, compared to 12.2 years for 50,000+ sq ft lettings.

We believe that this trend will continue in 2023, and that the average commitment from occupiers will continue to fall.

2. Slow start to the year for capital markets, but sentiment gradually improving

Following on from decade low investment volumes in Q4 2022, the expectation is that 2023 will start slowly with below-average investment activity. There are, however, reasons to be cautiously optimistic for the second half of 2023.

There remains a degree of investor caution across the London commercial market which is creating deal inertia. However, with signs of a stabilising economic environment, investors are beginning to believe that structural price correction has already happened – albeit some believe there is a small further correction due. The London market looks favourable in a global context, with the speed of correction far outpacing other European cities and Asian markets.

Prime deals have been rare of late, but the recent sale of New Street Square will provide much needed confidence to the market, particularly for the overseas investor. This deal also gives some pricing transparency to investors seeking benchmarks. Likewise, value-add opportunities continue to encourage investors to compete for opportunities which can be re-purposed into best-in-class buildings. Cost of capital is an obvious pressure, but debt pricing has already stabilised. Some investors may opt to buy with cash and then refinance at year end.

Areas of core London continue to see strong occupier activity, particularly those enhanced by new transport amenities or areas undergoing major regeneration. The lack of quality supply in these micro locations is causing rental levels for certain product to rise. Here investors can afford to be more aggressive in their capital and rental growth assumptions.

3. Super-prime rental growth still possible despite downturn

Bifurcation of the office market has evolved into trifurcation; super-prime, ‘typical’ prime and then everything else. Rental levels for a ‘typical’ prime unit are expected to grow at a steady rate of up to 3.7% depending on the submarket, however at the super-prime level these figures could increase further.

In certain locations, particularly in core submarkets, there is a shortage of high-quality, ESG-futureproofed, and well-designed space. Despite this trend being set against a backdrop of overall vacancy rates reaching 10 per cent, there is potential for rental growth in undersupplied micro locations. Mayfair, for example, has a new Grade A vacancy rate below one per cent, and a particular lack of built stock with larger floor plates. This has led to rents achieved in both pre-let space and the (much rarer) built stock being significantly ahead of the ‘typical’ prime level.

4. Sublease space will increase as economic pressure on occupiers grows

Similar to the early period at the onset of the pandemic, attention has once again turned to the release of tenant space.

Our data suggests that nearly 25 per cent of all available space across central London that is currently being marketed is tenant-released space. Whilst this proportion is above the long-term average of 15 per cent, it remains significantly below the peak seen during the GFC (37 per cent). There is, however, an invisible level of grey space that is not openly being marketed but is available, should the right terms be proposed. 

The correlation between employees and the amount of space leased has shifted since the pandemic but it should be noted that redundancies may not impact physical desk space if said roles are remote in nature.  There is, however, a strong possibility that any growth requirements, particularly in the tech sector, may be paused or cancelled.

Whilst far from universal, many occupiers are taking less space than they would have looked for pre-pandemic, albeit often of higher quality and a similar rental profile than before COVID-19. We are currently tracking up to 8.6 million sq ft of named active occupier demand across the market, against a long-term average of 10.5 million sq ft; an 11 per cent shortfall. Many of these requirements are stay vs go exercises, with others having a wide variance in the amount of space they require. This means the shortfall is likely to be closer to 20% compared to the long-term average. 

It is perhaps too early to tell if this downward shift in the volume of demand is permanent, although the impact of hybrid and remote working is set to continue as occupiers firm up internal policies.

5. Greater prevalence of fitted offices

One of the growing trends across the London market is that there is a greater prevalence of fitted options on the office market. Drawing on our own viewing data, we can see that demand for fitted space accounts for 38 per cent of viewing activity, compared to 26 per cent in 2021. This figure increases to 41 per cent when looking at viewings of 10,000 sq ft or below but falls to just 23 per cent for requirements above that threshold.

The benefits of fitted space for occupiers are significant, including:
- Speed of transaction
- Easier transition from serviced to conventional lease
- Easier to visualise working in the office
- Ability to smooth costs over the lease.

We think that 2023 will see more landlords explore the idea of providing fitted space as part of their wider offering, particularly as it will help them to reduce void periods, obtain a rental premium as well as add a bolt on service for potential tenants. It also allows both tenant and occupier to meet their sustainability objectives.

About the author
Christopher Dunn is Head of Insights for our London Offices team, he is responsible for producing forward-looking thought leadership content on key trends that are impacting the capital city. He regularly presents to clients and contributes to industry publications on topics relevant to London offices.

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