City rents rise as return to the office drives up demand for prime locations

Available office space in London’s most sought-after areas has slumped to near record lows as businesses continue to reverse pandemic-era working from home rules.

According to global property consultancy Knight Frank, availability in newly constructed office buildings has fallen to 0.3 per cent in the West End Core – which includes Mayfair and St James’s – and 0.5 per cent in the City of London.

This equates to just 379,394 sq ft of office space in two of London’s largest submarkets – less than eight months of average take up for new office space.

In comparison, vacancy rates across all London office stock currently stands at nine per cent, with a majority of this being space in average to lower quality buildings.

According to Knight Frank, there has been 7.3m sq ft of leasing activity across central London in the year to date.

The firm added that demand for new office space in the context of scarce availability has seen prime rents in the City rise 16 per cent over the past 12 months to £90 per sq ft. Similarly, prime West End rents are up seven per cent to £150 per sq ft.

Legal & General and BDO lead City office deals

The most recent quarter saw Legal & General agreeing to pre-let 190,000 sq ft at Woolgate in the City ahead of its move in 2027.

Accountancy firm BDO signed a long-term lease for a new UK headquarters at The M Building on Oxford Street.

The 220,000 sq ft pre-let, with construction completing next year, is the West End’s largest letting this year.

Cloud technology firm Monday.com also agreed to occupy 80,000 at 1 Rathbone Square in Fitzrovia.

This follows a series of largescale pre-lets agreed this year, including hedge fund Citadel’s deal to occupy 250,000 sq ft at 2 Finsbury Avenue in the City and investment bank Evercore committing to take 130,000 sq ft at 105 Victoria Street.

The final quarter of the year has seen global credit rating agency Moody’s agreeing to a new 110,000 sq ft headquarters at 10 Gresham Street in the City.

Knight Frank said London’s “robust occupier market reflects the city’s business resilience despite wider macroeconomic volatility over the past few years”.

The firm added that it had tracked 11.5m of current active office requirements; up 10 per cent year-on-year.

The city’s corporate roster currently includes 4,000 high-growth professional services companies, a 10 per cent increase from five years ago.

This is in addition to 6,960 high-growth technology firms, 23 per cent more than five years ago.

‘The best space commands premium rental values’

Philip Hobley, head of London offices at Knight Frank, said: “The growing reversion to office-first work policies amongst companies of all sizes has seen London’s newest best-in-class workspaces being acquired by those seeking to upgrade their corporate headquarters.

“The lack of available prime space means that companies are securing future office requirements further ahead of time, given competition in locations where vacancy is at historically low levels.

“A sizeable proportion of the lease expires in coming years is for space within older office buildings lacking what modern occupiers want, which means that the market will further bifurcate.”

Shabab Qadar, London research partner at Knight Frank, added: “Lease expiries will be the primary driver of demand going forward, which is evidenced by current active office requirements, but the development pipeline remains constrained because of planning and financing challenges.

“The contrasting fortunes within the London office market continue to be laid bare, with the best space commanding premium rental values but secondary stock requiring significant capital expenditure in order to be future proofed.”

Total annual commercial real estate investment returns rose by three per cent this year and are at their highest level since October 2022, according to the MSCI UK Property Index.