Annual take-up of South East offices has plateaued at 3.5m sq ft, following three years of marginal increases, according to Knight Frank.
The year finished at an almost identical level to 2022, which recorded 3.4m sq ft of take-up, but came in 3% higher than the five-year average. However, Q4 investment volumes lagged previous years, with transactions 55% lower than 2022 owing to uncertainty in capital markets.
Knight Frank recorded a total of £218m of investment transactions in Q4 2023. Despite being 57% up on the previous quarter, this was 69% below the 10-year quarterly average. This was driven by rising debt costs and the ongoing price gap between buyers’ and sellers’ expectations. The full-year total was £1.3bn transacted across 88 deals.
Only three transactions over £50m closed last year, the largest of which was Pension Insurance Corporation’s £267m acquisition of 2 Ruskin Square in Croydon. On completion in August, the site will be let entirely to the Government Property Agency.
Prime office yields jumped by 100bps to 7% during the year, which Knight Frank attributed to the steep rise in swap rates. This, combined with the erosion between UK gilts and office yields, led to yields for secondary stock moving out further.
Like the investment market, the leasing market was was boosted by an uplift in deals in the fourth quarter, when occupier take-up hit 1.4m sq ft. This reflected a 64% increase on Q3 and a 39% increase on total take-up in Q4 2022.
Also responsible for the increase were a handful of large leasing deals in the final few months of the year. These included Swiss pharmaceutical firm Lonza’s acquisition of the 184,000 sq ft former British Gas site at Thames Valley Park, as reported by EG in October, and global engineering company John Wood Group’s 120,000 sq ft letting at Reading’s Green Park.
Other noteworthy lettings included German life sciences firm BioNTech’s 80,000 sq ft lease at 1000 Discovery Drive on Cambridge Biomedical Campus, which EG exclusively revealed in January.
These contributed to a record 333 occupier deals which completed during 2023, with the average deal size coming in at 10,400 sq ft, the smallest since 1992. Almost three-quarters of transactions were for less than 10,000 sq ft.
Demand remained focused on grade-A space, which accounted for 84% of new leases during the year.
By sector, pharmaceutical and healthcare firms were the most active, accounting for 28% of space taken. This was concentrated in the Golden Triangle, as companies looked to improve their access to talent, clients and industry partners. As a result 25% of total South East take-up was in Cambridge and Oxford.
Roddy Abram, head of South East and Greater London offices at Knight Frank, said: “The gulf in demand between best-in-class space and older, unmodernised buildings continues to widen, with action driven by forthcoming lease breaks and a greater focus on sustainability likely to exacerbate this market picture in the future. Active requirements continue to grow. This, coupled with declining grade-A availability, should initiate a greater landlord response in terms of committing capital investment to future-proof spaces in 2024.”
Simon Rickards, head of national offices capital markets at Knight Frank, added: “The growing evidence of interest rates peaking and bottoming out prices should improve transaction activity in 2024, as buyer and seller price expectations align more closely. Investor sentiment will be supported by the robust occupier demand for high-quality offices in strong locations, which continues to attract both blue-chip and fast-growing companies. Prime assets in particular are attractively priced by historical standards, creating a window of opportunity given higher property yields and stabilising debt costs.”
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