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Landlords Have A Growing Competitor When Leasing Office Space — Their Own Tenants

An investor has walked away from a deal to build 1 Undershaft, rendered here at the centre of the City of London's skyscraper cluster.

The number of tenants looking to sublease London office space has grown sharply in the last quarter, with these occupiers playing an ever-larger role in the market.

There is 19.1M SF of available office space in London, according to first-quarter leasing data from Cushman & Wakefield, and 7M SF of that is controlled by tenants who are looking to shed some of their existing footprint. That is a rise of 9% on the previous quarter and means that tenant-controlled space now accounts for 37% of all space for rent. There were over 330 tenant-controlled spaces being marketed at the end of Q1, with 60 units being added since January, Cushman said.

The vacancy rate reached 6.8%, which is the highest since 2013 but well below the peak of 7.8% seen during the Global Financial Crisis. Prime rents remained flat in the West End and City at £102.50 per SF and £65 per SF, respectively. 

The amount of London office space leased in the first quarter of 2021 remained well below the long-term average. The 1.28M SF of deals done was 117% higher than in the final quarter of 2020, but still well below the five-year average for Q1 deals of 2M SF. Cushman said another 2.2M is under offer, a slight drop on the previous quarter. 

The legal sector represented the largest share of Q1 2021's take-up, accounting for 24% of total volumes. The banking and financial sector continued to be active with a 23% share of quarterly leasing volumes, followed by the media and tech sector, which accounted for a further 20%.

“Whilst sentiment seems to be gradually improving, we anticipate the next three to six months to be characterised by low take-up volumes and the potential for further increases in tenant supply. Forecasts suggest that leasing volumes will remain below long-term average levels, although the second half of 2021 should see an uptick in activity,” Cushman said in its Q1 London report. 

Cushman also expects prime rents will soften throughout the year, plateau in 2022 and begin to grow again in 2023. This won't look the same for every property.

“Clearly, there will be buildings and locations that are better insulated against the short-term rental decline, with the demand for 'super prime' office space still healthy,” Cushman said.