The office market has changed.
Evolving working patterns and employee expectations are prompting companies to re-evaluate the workplace. The purpose of the office is changing from a place for focused work, which can now be done at home or elsewhere, to a space for ‘creativity, innovation and osmosis’, as highlighted by the Cushman & Wakefield 2023 What Occupiers Want survey.
What is Your Company's Target Percentage for Communal Space?
Source: Cushman & Wakefield ‘What Occupiers Want Global Survey 2023’
Our report found that post Covid-19, office occupiers are now allocating 41% of their office space to collaborative spaces, up from 26% in 2019. Companies are keen to make their space as attractive as possible in order to encourage staff to make the commute and come back into the office.
This is already visible in the data with best-in-class Grade A office take-up now accounting for 58% of the overall volume transacted, up from 45% pre-pandemic.
Supply is however failing to keep up. Historically low availability across the key regional markets, combined with construction delays due to material and labour shortages, is starting to constrain occupier activity. Across the ‘Big Five’ CBDs, there is now just one year’s supply of Grade A stock available, relative to long term average take up. This imbalance at the top of the market is leading to strong rental growth where ‘super prime’ product exists as shown below.
In terms of future pipeline, developers are facing their most significant challenges for a generation with a perfect storm of rapid build cost inflation, 14 base rate increases and falling capital values rendering most speculative appraisals unviable at current rental levels.
As well as the increased cost of labour and materials, developers are also having to invest more in the specification of their buildings in order to meet occupier expectations and to achieve multiple sustainability targets and accreditations.
We’ve analysed the anticipated headline rents achievable for 10 schemes currently under construction across the main regional and South East markets, comparing these to their respective prime rents in Q1 2022.
We expect to see an average rental premium of 17.9% achieved versus Q1 2022, indicating strong rental growth by mid-2025 by which time all 10 will have reached completion.
Transactional evidence already proves that occupiers are willing to pay more for the very best or ‘super prime’ space that meets the latest ESG targets and their own aspirations. However, while tenants may be amenable to higher rents, they also expect more for their money. This is evident in the suite of sustainability credentials that the top buildings are now being challenged to achieve, along with features such as roof terraces, ‘end of trip’ facilities and, club lounges etc.
While macro-economic pressures may start to stabilise during 2024, continued growth in prime office rents is essential if new space is to be developed in the next cycle.