How is London’s City office market faring one year on from Brexit?

Almost one year on from the EU referendum and following a drop in sterling and significant global political changes, levels of office leasing activity in the City of London continue to show resilience and remain consistent with expectations for this point in the property cycle.Rolling back the clock, the City market has witnessed eye-watering levels of office take-up recently. In 2013 7m sq ft of offices space was let, the highest annual amount since 2000. According to Savills research, activity increased further in 2014 to set a new annual record of 8.2m sq ft,  with 2015 seeing 7.4m sq ft of office lettings. To put this into context, these three years saw roughly the same amount of leasing activity as the total of the five years before them.

This flurry of activity left the vacancy rate significantly more constrained than the long-term average of 8%, reaching a record low of 4.4% in mid 2015. Unsurprisingly, as the majority of the large requirements have been satisfied, and against a backdrop of record constraint of grade-A availability, we and the rest of the market expected that levels of take-up from 2016 would cool.Consequently the vacancy rate has begun gradually moving out, and by year end we expect a vacancy rate of around only 6.5%, well below the long-term average. Meanwhile, with 29% of future City office supply due for completion between 2018 and 2020 already prelet, there is now a limited supply pipeline. Recent prelets include Freshfields Bruckhaus Deringer LLP letting 288,000 sq ft at 100 Bishopsgate, EC2, and Fidelity International letting 104,000 sq ft at 4 Cannon Street, EC4.With these market fundamentals we expect any slowdown in leasing activity or new development – occurring as a result of the market cycle and wider political factors – to be comfortably cushioned.Furthermore, as developers execute greater caution than in 2013-15, new office buildings in and around the City coming forward in 2021 could be in short supply. At this point, when we expect to have greater clarity around Brexit, we could see strong competition for the best spaces, with new developments letting quickly at record rents.

Sound familiar? That’s because the Leadenhall Building, EC3, and 20 Fenchurch Street, EC3 – both developed during the last downturn to complete in mid-2014 – were let quickly, have remained fully let, and now boast a record City rent of £107 per sq ft (achieved at the Leadenhall Building in Q3 2016).Yet many companies are currently strategising business plans around Brexit and choosing to expand their mainland European businesses – for instance, JP Morgan’s decision to increase its Dublin office from 500 to 1,000 employees. However, they will keep around 11,000 employees in London and other occupiers are committing their long-term futures to London including Apple, Google and Wells Fargo.Confidence in London’s office market is clearly demonstrated by investor activity: central London (City and West End) recorded its strongest-ever first quarter in terms of investment volume in 2017 (£4.34bn). Foreign investors continue to view London as the safe-haven it’s always been: the financial capital of the world, a cluster of all the global tech giants, and a cosmopolitan city with a deep and varied talent pool. And it has the added attraction of cheap sterling to lure buyers.Adding to this are the first signs of a return of UK propcos and funds looking to invest in London after a short pause for breath following the referendum.