London office take up increased to just over 3.3m sq ft in Q2 2022, the highest since Q4 2019. However, sentiment points to a slowdown in the coming months with uncertainty over the current economic and political backdrop.
Based on letting evidence this quarter, Grade A rents in six out of the 16 submarkets have moved on, with the strongest growth in Mayfair & St James’ and Soho. Incentives have moved inward across four submarkets: Covent Garden, Fitzrovia, Mayfair & St James’ and Soho.
Availability ticked up to 8.5% in Q2, an increase of 0.4 percentage points compared with the previous quarter. This was principally the result of the completion of several delayed large refurbishments rather than the start of an upward trend.
Recent forecasts suggest that new build cost inflation in 2022 and 2023 will be a further 1.7% and 2.9% above where they were expected back only in March 22. For refurbishments, particularly brown to green, costs have increased to an average £400 per sq ft, compared with £300 per sq ft a year ago.
Investment transactions of London offices was just over £1.5bn in Q2. Barring the onset of the covid pandemic, this marks the lowest quarter of investment activity in London offices in over a decade. Debt costs and financing terms are expected to pause activity over the summer as investors take stock.
Yields are expected to be flat over the year on aggregate, with yield compression in H1 to be effectively reversed in H2. Market rental growth will feature in the higher quality end of the market. However, Grade B and below rents will fall as the market becomes ever more polarised.