The demand for top-quality office space in London is reaching unprecedented levels, with businesses approaching landlords up to six years before their current leases expire. Derwent London, a prominent developer and owner of offices in the capital, has reported that rents are rising even more rapidly than previously anticipated. Initially, Derwent London had projected rental growth between 2% and 5% for the year.
However, they have now revised their forecast, expecting rental growth to fall between 3% and 6% in 2024. This marks the second time the company has increased its forecast, highlighting the robust demand for prime office space.
Paul Williams, Derwent’s chief executive, commented on the trend, stating, “Occupiers are looking for space ever earlier. It used to be that, for a pre-let, people might start looking two or three years ahead [of their lease expiry], but now we’re talking to occupiers five or even six years out.” While older offices located away from main transport hubs struggle to attract tenants, modern, eco-friendly buildings are benefiting from a persistent “flight to quality.” Savills, a prominent property agent, has reported that companies worldwide are paying, on average, 31% more in rent to secure the newest, most sustainable buildings.
This “green premium” is particularly evident in London due to the scarcity of available “prime” office blocks. Several factors contribute to the limited supply of new, top-quality offices. Soaring interest rates and rising material costs have made office construction prohibitively expensive for some developers, particularly smaller ones. Additionally, prime land is scarce, and obtaining planning permission is often a lengthy and complex process. As a result, Mark Ridley, the chief executive of Savills, noted that businesses looking to move offices are experiencing a “genuine fear of missing out.” He stated, “Occupiers who’ve been sitting on their hands are realising that there is a dwindling supply of good, grade A office space for them to move into.”
Derwent London has already signed new leases this year, adding £10.8 million to its annual rent roll. On average, these deals have been agreed at nearly 10% above their expected value. The company collected £107.5 million in rent between January and June, a 1.5% increase compared to the first half of the previous year. Despite the challenges faced by the commercial property market in recent years, Derwent London remains optimistic about the future.
Williams stated, “Looking forward, we expect a recovery in capital values, principally driven by rental growth.” As businesses continue to prioritise quality and sustainability in their office spaces, the demand for prime properties is expected to remain strong. Landlords and developers who can provide modern, eco-friendly buildings are well-positioned to capitalise on this trend and command premium rents in the years to come. Tags: London office market, prime office space, rental growth, green premium, sustainable buildings, flight to quality
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