Offices
Office rental levels across England & Wales have been relatively stable as a sector, showing an average of 4% growth in England and 9% growth in Wales since 2015. Pre-Covid, these markets were performing well, with average growth of 10% over the five-year period. Although the pandemic has created obvious uncertainties, the effects have not been universal, with a number of regions actually showing growth.
The major reason why some regional markets have performed strongly results from a lack of quality office space across many of the major cities. This has resulted in the strongest performer, North-West, growing by 20% between the two rating lists. The West Midlands and Eastern regions follow closely behind, growing 18% over the six-year period.
In contrast, Central London has experienced a fall in the office market of around 4%. Up to March 2020, Central London offices were showing growth of just under 9%. Over the next year to April 2021, the market fell back by 12.5%. This has clearly been driven through uncertainty in future office requirements, as businesses grapple with accommodating flexible working arrangements. Understandably, market activity at the April 2021 valuation date was significantly reduced, with businesses delaying making hard and fast decisions whilst Covid-19 was still prevalent and impacting commuter and business travel.
Regional office trends
At each rating revaluation over the last twenty years, the London office market has grown disproportionately to the regions. In the 2017 rating list, Central London made up 54% of the total English rateable value pool for offices. We predict that this will be reversed for the 2023 revaluation, with London’s share dropping to just below 50%.
Whilst the Central London office market has been hardest hit, evidence is suggesting that best prime space has proved more resilient than the secondary and fringe markets, where the falls have been higher.
Pre Covid-19, the Central London office market was already weakening against a backdrop of Brexit uncertainty. This was not evidenced through significant falls in headline rents, but through improved rent-free periods for tenants. This trend has continued during the pandemic, although evidence is less conclusive due to more limited transactional deals.
From 2015 until the onset of the Covid-19 pandemic, the Central London market has also been driven through the increase in demand from the flex space market. This growth completely dried up during the pandemic, as the flex-space market sought to consolidate in response to very weak occupancy levels.
Ultimately, the main problem with the 2023 revaluation is that valuations will be undertaken at a point where behaviour and the reasons not to travel to the office are unprecedented. Although there is much conjecture as to the impact of hybrid/flexible working, the longer-term trends and underlying market effects have yet to be established.
CHANGES IN RATES LIABILITY BY REGION BETWEEN THE 2017 AND 2023 REVALUATIONS (OFFICES)
Prime office rents
Avison Young has forecast the changes in annual liability for prime offices in the penultimate year of the 2017 revaluation and the first year of the 2023 revaluation. These prime rents show a much more stable performance than experienced across the wider office sector, with prime offices in the regional markets performing particularly well. Those markets characterised by undersupply, such as Bristol, have seen the largest increases (36%). In contrast, prime offices in London's West-End, traditionally one of the strongest office markets, have taken a hard hit, with prime rents falling close to 10% between the 2015 and 2021 valuation dates. This market does not currently have the supply shortfall demonstrated by many of the regional cities and has more recently suffered from the fall away in performance of the flex space market.