London office leasing will surge 12 per cent this year due to the highest demand for office space in a decade, a leading UK real estate broker has predicted. However, a fifth of this activity could be from tenants downsizing, and those who will move only want new or refurbished stock, presenting a challenge for the UK’s big office real estate investment trusts (Reits).
According to Knight Frank, tenants will sign for 12mn square feet (sq ft) of office space this year, a return to the long-term average and a jump from the 10.7mn sq ft leased in 2023. The estate agency said the 11.9mn sq ft of “active requirements", which refers to the amount of London office space tenants tell agencies they need, is the highest since 2014.
Finding the Reit office
Knight Frank said the demand is coming from tenants with expiring leases keen to move to better quality and newer spaces post-pandemic. It added that most of the requirements are from UK-based mid-sized companies that had put off decisions about office space needs due to uncertainty around hybrid working, but are now being forced into a decision because their leases are due to expire.
Some 80 per cent want to upsize or keep their office space the same. However, 20 per cent of the active requirements recorded by Knight Frank are for tenants looking to downsize, with companies needing less floor area but wanting higher-quality spaces due to flexible working.
“People have realised that if they are going to persuade people to come back to the office, it has to be a brilliant office,” Dan Gaunt, Knight Frank’s co-head of London leasing, told Investors’ Chronicle.
Since the pandemic, the big London office Reits – Land Securities (LAND), British Land (BLND), Derwent (DLN), Great Portland Estates (GPE) and Helical (HLCL) – have struggled to grow their London office net rental income, which has contributed to the pressure on their dividend payments, asset values, and share prices. Last year, Jefferies’ analyst Mike Prew predicted a “rental recession” due to excess stock and low demand, downgrading Landsec, British Land, Derwent, and Great Portland accordingly.
Knight Frank’s numbers suggest the situation might not be that dire. While vacancy is still at record highs in most of London’s sub-markets, the vacancy rate for new and refurbished stock, which accounted for 75 per cent of City leasing and 56 per cent of West End leasing in 2023, is low enough that Knight Frank predicts that rents in this area will rise. This year, the agency has redefined ‘prime rents’ to refer to a higher standard of new and refurbished office space than in the past.
Meanwhile, Knight Frank says the pipeline for new London office stock is drying up due to high interest rates and investor bearishness over London offices, meaning there is less of the type of stock that tenants want. If the agency's predictions prove correct, 2024 could be a better year than expected for the London office Reits – provided they have the funds to bring their stock up to standard.
