Published on 14 Apr 2020

Coronavirus spread set to hit London’s leasing market




 

The outbreak of Covid-19 will likely lead to a readjustment in rents and rent-free periods across London’s office market as landlords compete for fewer footloose tenants in a weaker, post-coronavirus market, according to Michael Pain, head of the tenant advisory team at Carter Jonas.

“Businesses are increasingly likely to take a wait-and-see approach before committing to high-capital-expenditure projects, such as an office relocation, to see what impact the pandemic has on revenues and staff headcount,” he said.

“Tenants with lease expiries, that have not already committed themselves to a preletting contract on alternative premises, may decide to defer a planned office move and seek a short-term lease extension from their landlord, pending a reassessment of the business’ operational and floorspace needs later, when economic conditions become more certain.”

Buildings that might have been considered too expensive for some occupiers, however, may now end up priced at a level that is attractive enough to encourage movement.

In addition: “Some landlords may well have the opportunity to restructure tenancies with their existing tenants and keep space filled and income-producing,” Pain added.

“Equally, the serviced office sector may see an uptick in demand from those occupiers who are unable to agree terms to extend their leases with their current landlord – and who simply need short-term breathing space to regroup and assess their accommodation needs post-Covid-19.”

Healthy Q1 performance

The fallout from the global pandemic on London’s office market has yet to be fully realised. Vacant space was near a record low and rents grew during the first quarter of the year across the capital.

Farringdon, for example, has seen an uplift in average rents of more than 13% over the past year. Rent in the submarket has increased on average from £75 per sq ft in Q1 2019 to £85 per sq ft in Q1 2020 and is now 31% above where average rents were in early 2018, data from Carter Jonas shows.

This rental growth stems from the regeneration initiatives associated with Crossrail and the construction of buildings that have set new rent benchmarks in the area.

Farringdon has also witnessed a jump of more than 20% in occupancy costs since Q1 2018, reaching £118 per sq ft per year in the first three months of 2020, off the back of the substantial rent increase in the submarket.

Meanwhile, Mayfair and St James’s have experienced a resurgence over the past year. Having fallen from an average of £110 per sq ft in Q1 2018 to £105 per sq ft in Q1 2019, rents are now, on average, £115 per sq ft, Carter Jonas reported.

The submarket has also consistently had the highest occupancy costs during the two years to Q1 2020, standing at £178.20 per sq ft per annum during the start of this year.

In addition, Carter Jonas has recorded rent rises Marylebone and Fitzrovia, which have both moved up from £85 per sq ft in Q1 2019 to £92.50 per sq ft in Q1 2020 due to an increased demand for new grade-A space along the route of the Elizabeth Line and limited supply.

Stratford remains the cheapest submarket for occupiers, with average rents sitting at £49.50 per sq ft per annum and occupational costs only nudging up from £70.80 per sq ft on average in Q1 2019 to £71.10 per sq ft.

Covid-19 will cause havoc for some occupiers as developers of several new office buildings in the capital, including 22 Bishopsgate, have shut down. That will disrupt completion timelines and office moves.

“A number of those occupiers that have already entered pre-completion of construction letting agreements may now need to extend the leases on their existing premises to tide them over until such time as the building that they were scheduled to move in to is ready,” Pain said.

“While we expect most landlords will work to accommodate such requests – not least to provide them with continuity of rental and service charge income, as well as deferring the landlord’s exposure to a business rates liability, difficulties might arise when the tenant’s existing space has already been committed to another occupier. In these circumstances, those occupiers that have been affected by the delayed completion of the building that they are committed to leasing will need to consider alternative temporary accommodation – serviced offices would be an obvious solution.”

 https://www.egi.co.uk/news/coronavirus-spread-set-to-hit-londons-leasing-market/