Prime rents unlikely to recover to pre-pandemic levels before 2022, says global membership body.
The abrupt decline in leasing activity in London’s office market has already translated into falling rents with the worst still to come, according to office specialists from the Society of Industrial & Office Realtors (SIOR). the leading global professional office and industrial real estate association.
A combination of stalled deals, increasing vacancy as tenants begin to offload suplus space and lease breaks has slowed leasing activity down to 1.2 million sq ft in Q2 2020, representing a 57% drop on the previous quarter, according to figures from DeVono Cresa.
Based on the same data from DeVono Cresa, this has already impacted rental levels with prime rents on Grade A space dipping by an average of 3% since Q1 2020. The biggest falls have been recorded in traditionally robust submarkets such as Mayfair (-8%) and Soho (-8%).
Paul Danks, Director at DeVono Cresa, and President-Elect of SIOR Europe, said: “As a result of the ongoing pandemic, we expect the lettings market l to remain subdued compared with historical levels mixed with increased appreciation for flexible office space. This will, in turn, lead to an increase in availability across central London. What we are seeing, and in a very short period of time, is a swing in the balance of power back towards the tenant.”
Though these figures are unsurprising, Nick McCalmont-Woods, CEO of McCalmont-Woods Real Estate, believes there is potentially worse news yet to come as the UK officially enters its first recession since the Global Financial Crisis (GFC).
“What we saw with the GFC of 2008/2009 was an initial softening of rents in the immediate aftermath of Leman Brothers’ downfall. 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”, he said.
The analysis [see table below] from McCalmont-Woods Real Estate shows that, though London’s prime office rents experienced a decline of between 9% and 21% over the first twelve months of the GFC, it took another twelve months for the market to reach bottom with prime rents having fallen between 16% and 39% from their peak at the end of 2007.
“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 longer-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. On that basis, we are unlikely to see the true impact of COVID-19 on rental levels before Q4 2021/Q1 2022 and cannot anticipate prime rents returning to 2019 levels any time before 2022, and possibly much later, if history is to repeat itself”, adds McCalmont-Woods.
Paul Danks, added: “While it would be unwise to bet against the long-term resilience of a market like London, there can be little doubt that we are going through a major period of re-adjustment. As occupiers’ understanding of the new working world improves and landlords’ responses to it evolve, we will all have to learn to live with a little more uncertainty”.
About SIOR
The Society of Industrial and Office Realtors ® (SIOR) is the leading society for industrial and office real estate professionals. Individuals who earn their SIOR designation adhere to the highest levels of accountability and ethical standards. Only the industry’s top professionals qualify for the SIOR designation. Today, there are more than 3,400 SIOR members in 685 cities in 38 countries. www.sior.com
