Industrial: Supply contracts for the first time since 2022
The total availability of logistics and industrial units over 50,000 sq ft fell to 64.8m sq ft during Q1 2024, the first quarterly contraction in immediately available space recorded since Q2 2022.
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Retail: Occupational market remains resilient
The retail occupational market, whilst being impacted by tough macroeconomic conditions, continues to show its resilience. Although the sector has seen significant rationalisation over recent years, occupiers are capitalising on realigned rental values, and sticky voids in order to attain favourable terms and secure strong retail pitches in new locations.
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Office Space
A robust end to the year reported 4.2 million sq ft transacting across the Big Five (Birmingham, Bristol, Edinburgh, Leeds and Manchester) and Central London office markets in Q4 – the highest quarterly volume since Q2 2019. This was up 25% on Q3 and 35% above the five-year quarterly average. Grade A activity dominated both markets, accounting for a record of 71% of the total leasing volume, exceeding the previous record of 70% set in the last quarter. The 3.0 million sq ft of Grade A space transacted was 68% above the five-year quarterly average and the highest quarterly volume since Q3 2018.
Overall, leasing across 2023 as a whole totalled 12.8 million sq ft, 2% below the five-year annual average. Grade A activity however was 19% above the five-year annual average at 8.7 million sq ft which is the highest since 2019 and amounts to 68% of the total 2023 volume – a record high proportion.
Availability decreased to 34.3 million sq ft in Q4, down 1% versus Q3 and 38% above the five-year average.
Occupier demand for the best spaces, combined with rising construction costs pushing up viability requirements, has led to strong rental growth across prime markets, averaging 5.9% over 2023 in the Big Five and Central London.
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Prime Central London Residential
Average achieved £ per square foot values in Prime Central London residential increased significantly during Q4 2020 (from Q3 2020) buoyed by a strong Autumn market. While a quarterly rise in isolation does not necessarily indicate a continuation of recent house price inflation, it acts a strong indicator of overall market strength. While our 365-day index of rental values shows rental prices remaining in a state of lockdown induced freefall, the average £ per square foot, per annum value achieved in Q4 2020 indicates we may be about to see the bottom of the market. With lockdown restrictions potentially being eased in April, we would anticipate a return to rental inflation towards the end of May. The combining factors of stable values and falling rents has seen gross rental yields in Prime Central London fall below 3% for the first time in recent history. This contraction is even greater in Outer Prime London markets, where these combining trends are exaggerated.
Europe Office Market
Demand for office space across Europe remained subdued. Despite a modest 6% increase in leasing activity to 2.5m sqm in Q3 2023, overall activity is trending lower. Over Q1-Q3 2023 leasing activity totalled 7.2m sqm, down 21% from 8.9m sqm in the same period for 2022. We see a clear bifurcation in activity. Although demand for all grades of asset fell, activity for Grade A was down a more modest 6%. The amount of available space grew (+1.1%) over the quarter to stand at 24.7m sqm.
Despite the reduction in demand, rents at the prime end of the market continue to hold up. Rents grew by a further 0.9% in Q3 versus a 1.4% increase in the previous quarter. Annual growth remains strong at 5.4%.
We expect leasing activity to remain subdued over the rest of the year and into 2024 as businesses await more clarity in the outlook. We expect positive rental growth to be sustained at the prime end of the market as the shift towards hybrid working supports demand for the best in class and sustainable space in most connected locations.
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UK Hospitality Market
Despite ongoing market uncertainties and an impending UK general election, the start of 2024 has been positive for the UK hotel investment market. First-quarter investment volumes have surged to the highest levels since 2019, primarily driven by two large portfolio sales at the beginning of the year. Overall, enduring positive sentiment for the sector suggests a favourable trajectory for deal flow as the year progresses, with anticipated base rate cuts in H2 2024 and overnight stays projected to surpass 2019 levels.
