The Story So Far 1977-2022
Cushman & Wakefield’s rental records began in the second quarter of 1977, and at that point in time, the City recorded prime office rents of £12.50 per square foot and by the end of the Thatcher era in 1990, these rents stood at £57.50 having peaked at £65.00 psf in late 1988.
John Major adopted an already troubled economy which fell into recession in 1991 after an economic boom in the late 1980’s. Major retained office until mid-1997 having won the 1992 election, and during this period rents increased from £40.00 to £42.50 psf. However this increase masks the time in between, when rental values actually dropped to a low of £31.25 per sq ft before rising once again in 1994.
The shift in power in 1997 saw Tony Blair inherit an already recovering economy. At the start of his government, rents were at £42.50 - peaking in 2001 at £63.75, broadly in line with levels that were seen at the end of the Margaret Thatcher era. Unlike Margaret Thatcher, however, Tony Blair rode out a recession during his time in office which lasted from 2001 until 2004 when City Core rents dropped to a low of £45.00 psf, reflecting a 29% fall in headline rental values. Tony Blair however won the subsequent 2005 election retaining a Labour majority, and during his second term, he was able to see out the economic recovery. Tony Blair spent a total of 10 years in office, and during that time, rents rose by 50%. In mid-2007, he handed over power to Gordon Brown just as the market was preparing for yet another downturn.
At the start of Gordon Brown’s term, rental values in the City peaked to £65 psf at the end of 2007 – the highest recorded rents at the time – however the Global Financial Crisis put a stop to this. Within a quarter, the rent fell by 6% to £61 psf and further declined to reach its lowest point in Q3 2009 (£42.50 psf) – falling by 35% from peak to trough (December 2007-December 2009). By the time Gordon Brown left office in May 2010 by way of election, rental values were already beginning to tick up.
Following his departure, power shifted once again back to the Conservatives when the UK was still firmly in recession. However, a hung parliament and a forced coalition government with the Liberal Democrat’s meant that the Tories didn't necessarily seal the deal and rents plateaued between Q1 2011 through to Q3 2013 at £55.00 psf. At this point, and as the UK headed out of recession with positive albeit subdued GDP growth, City rents began to improve once again. By mid-2015, the Tories secured a Commons majority and rents continued to climb until 2016 when Central London real estate experienced a bumper year with office rents reaching £70.00 psf.
After the disaster for David Cameron that was Brexit, his ultimate resignation paved way for Theresa May to assume responsibility. At that point in time, with uncertainty surrounding the result of the Brexit referendum and what it means for the not only London but the UK, office rents dipped marginally. In order to stabilise both the government and the economy, Theresa May called a snap election in April 2017. This however did not initially secure rents as they subsequently fell in the latter half of 2017 to £67.50, from the pre-snap election level of £68.50 psf.
Rents did not rise under Theresa May until the final quarter preceding her resignation, they remained at £67.50 psf for seven consecutive quarters before rising marginally to £68 psf in Q2 2019. Theresa May's uncertain and troubled time in office came to an end soon after when she tended her resignation and Boris Johnson followed as her successor.
Rents rose immediately, by 2% over his first quarter as PM to £68 psf. Johnson followed suit in calling a snap election to stabilise his government in Q4 2019, which was a relative success. At this point, rents once again peaked at £70.00 psf at the end of 2019, although this was the general direction of travel from the time at which he took office.
City office rental growth was in a relatively strong position at this point, and had the pandemic not hindered growth throughout most 2020 and the first half of 2021, there could be an argument to say that rents were likely to continue rising under Boris Johnson’s Tory majority. Nevertheless, this was not the case and during this period, rents reached a low of £65.00 psf, a level not seen since 2015 when David Cameron was prime minister.
The current state of the post-pandemic recovery indicates that rents have steadied back to 2019 levels, and after a strong first half of 2022, when leasing activity was particularly strong across Central London, City office rents increased to £72.50 psf – the highest recorded headline rent since our records began.
Where are we now?
The precarious state of the government, due to ongoing scandal, could hinder further growth. Office rents either stagnate or dip after a change of hands mid-term, while elections appear to increase confidence in the market and leads to an increase in prime office rental values.
Boris Johnson had the choice to call a snap election to once again stabilise his majority in government and also steady the wavering economy. Yet he has executed the option of resignation and a handover of power to one of his peers, and, as trends have indicated, City office rental value uncertainty tends to follow these resignations. However, with a two month resignation period and a longer leadership race, this might not be the case.
As trends have suggested, when resignation occurs and power is handed over, the incumbent PM takes on an uncertain marketplace: one that is either deteriorating or destined for downturn. This is evident in the case of John Major, Gordon Brown and Theresa May. Boris Johnson has been the exception to this trend, having taken on a market in 2019 that was already beginning to climb back to the record levels seen in 2016. The pandemic inevitably and inescapably created a barrier to further growth of office rents.
Johnson will however officially hand over the reins on 5th September 2022, but not before seeing rental growth of 6.6% during his tumultuous three-year premiership, and, as mentioned previously, being in office when City office rents reached a record £72.50 psf at the end of Q2 2022.
So what next for prime City rents? It’s no secret that we are in for an uncertain 12-18 months and all eyes will be on the next PM as the UK continues to ride the wave of multiple headwinds facing our economy, which will in turn impact London’s office market. Is the Boris boost in rental values sustainable, or are we in for a Major correction?
* The rental values referenced throughout this article relate to the consistently achievable headline rental figure for new prime, well located, high specification units of a standard size (10,000 sq ft) commensurate within the City Core market area, assuming there is always existing demand and available supply.
London Office Market Puts its Truss in New Prime MinisterJudgement day is upon Liz Truss, the latest Conservative Party leader and the UK’s fourth Prime Minister in ten years, as UK real estate experts watch on eagerly to see how their markets could be affected by this power shift. We can expect that irrespective of any immediate economic policy changes, there is a very high probability that prime rental values for Central London offices will dip in the coming quarters.
Analysis undertaken by Cushman & Wakefield last month revealed the trends surrounding governmental change on prime office rents in Central London since 1990. We identified that when power is handed over mid-term, the new PM will struggle to maintain prime office rental levels and with it will commandeer a ship in rough economic waters. Boris Johnson has abandoned ship at an extremely volatile time, leaving Liz Truss facing an imminent recession and economic policy change will be vital for keeping the country afloat in a time that is already proving very difficult for many. It is no extraordinary feat for a Prime Minister to ride out a recession – we have seen this in recent memory with Major and Blair both nursing a return to economic prosperity. However, it is harder for a PM with no voter backing to achieve an economic turnaround as the fate of Gordon Brown would demonstrate.
Thus, the UK is likely to see a snap election announced within the next 18 months. This move oftentimes stabilises government majority – and also office rents – as seen in both the cases of May and Johnson. Office rents either stagnate or plummet after a change of hands mid-term, while scheduled end-of-term elections appear to be more effective in increasing confidence in the market and is more likely to lead to an increase in prime rental values.
Whomever was destined to move into number 10 was set to have a rough ride, as public opinion of government is at an all-time low due to the cost of living crisis and handling of the energy bill crisis. Voting intention has swayed in the Labour Party’s favour, with YouGov stating the Tories are 8% behind and Ipsos claiming this figure is 14%. Either way it doesn’t look good for the Tories from here and they will need to pull a certain miracle out of the bag to convincingly turn things around – a united front will pay dividends in surviving the tumultuous months ahead.
Given the results of our analysis, if trends are set to continue we could predict prime office rents in Central London are set to dip slightly before the end of the year. Prior to Johnson’s resignation, Cushman’s had forecasted prime rents to reach £74.00 psf in the City by the end of 2022, an attainable figure having reached £72.50 psf at the end of Q2. Forecasting at the start of the year showed a much brighter picture, however the political and economic climate was vastly different and no one could have truly anticipated the effects that the Russian invasion of Ukraine would have had on the UK. Rising inflation and the cost of living crisis is another serious issue, and coupled with increasing interest rates, the UK’s economic outlook does not look particularly positive. While the economic outlook does look dull, the official outlook for rents issues by Cushman’s indicates that rents are still set to rise by the end of the year.
With the economic policies planned by Truss, looking at the more cynical outlook we see that inflation could be pushed to 13% this year and 15% in 2023. Government borrowing is likely to increase in tandem with this, putting further strain on interest rates. These will be major factors influencing transactions in the office market in London, both from an investment and occupational perspective and will most certainly dictate the direction of travel for rents and yields. Despite this uncertainty, demand for high quality, accessible space in Central London which offers added amenity both inside the office building and in the surrounding area, is likely to remain attractive. In doing so, London will undoubtedly prove to the world once again its resilience in the face of economic adversity, if the Global Financial Crisis and post-covid rebound are anything to go by.
Insights • Economy
Availability of Grade A space demanded by occupiers remains low and below 2% of total office stock in many key markets.
Real estate services firm Cushman & Wakefield has advised GSK plc on the sale of the surplus development land that sits alongside its 1 million sq ft Research & Development (R&D) facility in Stevenage to UBS Asset Management and Reef Group.