Industrial: Take-up still above long-term average
The market closed 2022 having seen two successive quarters of contractions in take-up volumes. Take-up fell to 10.2 million sq ft during Q4, down from 11.5 million sq ft during Q3. Despite this, 2022 take-up volumes remain the second strongest on record, and the sector has continued to demonstrate its resilience amidst a backdrop of challenges facing landlords, occupiers, and developers alike. The most notable change throughout 2022 was the shift in demand dynamics, which saw a significant fall in demand from e-commerce and post and parcel occupiers, whilst simultaneously seeing significant growth in demand from manufacturers, seeking to re-shore and safeguard their supply chains within the UK. Take-up remained focussed on good quality stock, with 72% of space being taken in Grade A units throughout the year. Furthermore, occupiers looked to secure space early, with Build to suit schemes and pre-lets accounting for 43% of total take-up, its highest level over the last three years.
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Retail: Retailers scramble to navigate cost of living crisis
Despite some positivity around the Christmas trading period and an incremental increase in consumer confidence during December, retailers are rapidly transitioning their efforts to overcome the cost-of-living crisis and ensure healthy cash flow remains. Away from the Luxury category, several retailers are under-taking both store and range rationalisation strategies re-focussing efforts on their top performing locations and products in order to avoid administration or business failure. Such has been the effect of harsh trading conditions throughout H2, as of November sales volumes remained slightly below their pre-pandemic 2019 levels, and significantly below their 2021 volumes, whilst 2022 total sales values outperformed both years owed to the impact of inflation.
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Take-up in the Big Six regions and Central London totalled 3.88 million sq ft in the final quarter of 2022, an increase of 5% on the previous quarter and 4% above the 10-year quarterly average. The Big Six reported strong Q4 leasing activity amounting to 1.29 million sq ft, 175 above the 10-year average while Central London reported 2.59 million sq ft of transactions which is 1% below its respective 10-year average. In 2022 as a whole, the Big Six and Central London office markets achieved 14.51 million sq ft of take-up, level with the 10-year annual average.
Despite the strong finish to the year, the Big Six markets were 8% below their average take-up with Central London also 1% down in 2022. Both the Big Six and Central London reported lower levels of large-scale leasing in 2022 than is typical. Deals in excess of 50,000 sq ft accounted for only 11% of Big Six take-up below the 27% five-year average, with 32% in Central London, also below the 38% average.
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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
A total of 12.6 million sq m of office space was leased in 2022, a 15% jump on the 10.9 million sq m leased in 2021, and sits well above the fifteen-year average of 10.3 million sq m. The growth in activity was evident across the majority of markets with 23 out of 30 markets tracked reporting year-on-year growth in leasing activity. Major markets including Milan (+37%), Warsaw (+34%), Madrid (+32%), Paris (+26%) and London (+22%) all showed robust levels of activity.
The total amount of space available for occupation across Europe showed a modest 0.7% increase year-on-year to 22.6 million sq m. Equivalent to 8.1% of total stock. This ratio has been stable at this level over the previous four quarters.
The drive for good quality space has helped drive rental increases on prime offices, which rose by 6.2% year-on-year in Q4 2022 compared with just 1.7% in Q4 2021. This was the strongest annualised reading since mid-2008. During Q4 rents grew by 2.1%, up from 1.7% in the previous quarter. Three quarters of the 46 markets tracked showed rental growth over the year.
While the market is not immune to broader economic headwinds, over recent quarters we have seen completion levels start to fall and the level of construction activity fall too. A total of 4.3 million sq m of new space was completed in 2022, down from 4.8 million sq m in 2021. Completions in the fourth quarter reached 1.0m sqm, a 6% rise on Q3 2022.
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