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London Office Rents Are Falling, And Might Not Bottom Out Until 2022


London office rents are already falling, and may drop by 40% before hitting bottom, according to office specialists from global membership body the Society of Industrial & Office Realtors.

A combination of stalled deals, increasing vacancy and lease breaks has slowed leasing activity down to 1.2M SF in Q2 2020, representing a 57% drop on the previous quarter, according to figures from DeVono Cresa.

This has already impacted rental values, with prime rents on grade-A space dipping by an average of 3% since Q1 2020, DeVono Cresa said. The biggest falls have been recorded in traditionally robust submarkets such as Mayfair (-8%) and Soho (-8%).

“This sudden increase in availability is already prompting a swing in the balance of power back towards the tenant,” DeVono Cresa Director and SIOR Europe President-elect Paul Danks said.

There could be more rent drops to come.

An analysis from McCalmont-Woods Real Estate showed that, though London’s prime office rents experienced a decline of between 9% and 21% over the first 12 months of the global financial crisis, it was another 12 months before the market hit bottom, when prime rents fell between 16% and 39% from their peak at the end of 2007.

“During the GFC of 2008/2009 we saw an initial softening of rents in the immediate aftermath of Lehman Brothers’ downfall,” McCalmont-Woods Real Estate chief executive Nick McCalmont-Woods said. “Yet as the economy contracted and the recession deepened, landlords were persuaded to offer far more competitive terms to attract a dwindling pool of occupiers.

“As occupiers adjust to the impact of COVID-19 on their businesses and scale back, delay or even shelve some office requirements altogether, we expect the pattern of rental decline from the GFC to repeat itself and, if anything, it may be exacerbated further in the event that significantly more tenant/occupier-controlled space is released back on to the market as businesses adopt new working practices in the long-term.”

Consequently, there is likely to be considerable uncertainty in the months ahead with rising unemployment, dwindling demand for space and an expectation that rents will tumble across the office sector, McCalmont-Woods said. On that basis, we are unlikely to see the true impact of the coronavirus on rental levels before Q4 2021/Q1 2022. If history repeats itself, prime rents likely will not return to 2019 levels any time before 2022 and possibly much later.