Encouragingly, whilst demand for office space has fallen and deals have been significantly impacted, we’re still anticipating a healthy uptick in activity as and when the situation returns to some sort of normality in 2021.
As our latest London Offices Snapshot reports, vacancy rates are still well below average and with many occupiers looking to retain space to accommodate offices redesign strategies, the London office market continues to resist the prospect of oversupply issues. However, ‘grey space’ – offices that are not needed an occupier but are not officially on the market - will most likely be the driver of any vacancy rises throughout the remainder of the year.
Ultimately, the unwinding of Government support in late October will be the true test of potential distress amongst London businesses, but this will be most keenly felt in the retail, leisure and hospitality sectors and less so across the office market.
And if ‘grey space’ creates some new supply then it will be counterbalanced by the continued dearth of new Grade A space – and this is what most occupiers want. Delivery of new product will be even more constrained, delayed or possibly mothballed. This will depend upon scale, funding concerns or even geography. New Grade A space will remain at historic lows throughout 2021 and into 2022.
Contrary to what people might imagine, we’re still seeing healthy amounts of space put under offer, albeit much of it dating from pre-Lockdown times. Assuming lockdown easing continues and there is a gradual return to normality, leasing volumes will improve in Q3 and into Q4, but we still expect to see annual take-up levels at least 25% below the long-term trend.
Headline rents are holding firm for now, although we expect downward pressure towards the end of 2020 as grey space grows and occupiers revise requirements and economic support is removed. Next year looks far more encouraging with a potential bounce-back in headline rental growth as the availability of Grade A space remains extremely low.
So, there’s no need for distress signals at present and we envisage the market to progress as we navigate our way into 2021.