Occupier demand is rapidly reawakening in the South East office market, but demand is changing.
After the trauma of 2020, activity is now showing clear signs of recovery in the South East office market. On the heels of a marked improvement in the first quarter of 2021, Q2 take-up is expected to rise to within 10% of trend level, boasting sizeable deals in excess of 50,000 sq ft such as Amazon in Reading and IHG in Windsor.
Nowhere was spared from the impact of the pandemic, although some markets fared notably better than others. Oxford stands out as the only location where take-up in the year to Q1 2021 ran ahead of its annual average. Key to its leading performance was the resilience of life sciences, with the Pharma & Health sector accounting for a notable 16% share of total take-up across the region.
Amid the generally cautious landscape, a substantial weight of global capital continues to seek out defensive product. In the wake of the pandemic, this has been reflected in strong demand for covenants in pharmaceuticals and life sciences. Approximately £1.5bn has been deployed into product used by, or targeted at, science occupiers since the pandemic hit in March 2020, over half of total volume.
Supply-wise, the South East enters the post-pandemic era in strong shape. While total supply has picked up by 10% in the year since the pandemic, it remains relatively balanced in a historic context, standing 31% below the height of the global financial crisis in 2009.
In sharp contrast with previous downturns, prime headline rents have proved resilient the past 12 months. Indeed, seven of the 25 key South East markets saw headline rents tick up, typically linked to the delivery of high new or refurbished space. Oxford stands out, recording considerable growth of 18% over the year.
Spotlight on Oxford
Oxford’s reputation in life sciences has been fundamental to its strong performance over the past year. Oxford is the South East’s best performing market over the year to Q1, with take-up standing 5% above the annual average. Anchored by the University of Oxford, the city’s global reputation in life sciences has been key, with major fundraises spurring further growth in activity. Drugs developer Evotec has been the most acquisitive, expanding into a further c. 57,000 sq ft at Milton Park in H2 2020 and taking their total occupation to over 200,000 sq ft. Other notable pharma-based deals include Oxford Biomedica at Oxford Business Park (11,432 sq ft) and Exscientia at Schrodinger (12,723 sq ft).
Bucking the wider regional trend, there is strong appetite for new speculative development in Oxford. Quad 2 (45,000 sq ft) at Harwell Campus is presently under construction, with delivery scheduled in Q1 2022. Elsewhere, Magdalen College is scheduled to commence construction of 160,000 sq ft of new office and lab accommodation at OSP following the completion of their process for a new JV partner, while St John’s College has plans to develop an innovation barn and two 60,000 sq ft lab buildings at Oxford North starting this autumn.
Spotlight on Maidenhead
Despite very subdued activity over recent months, Maidenhead is well-positioned to capture occupiers decentralising from London, boosted by the arrival of the Elizabeth Line, which is anticipated to commence full service in 2022.
The out-of-town market has attracted the focus of activity over recent months and was home to both Q1 2021 deals. Meanwhile, a recent boost in grade A supply in the town centre is also expected to lead to improved activity over the coming months.
Spotlight on Reading
After an extremely subdued period, Q1 take-up hit an impressive 190,000 sq ft, equivalent to 90% of 2020’s annual total. This was dominated by Three’s lease of 117,000 sq ft at 450 Longwater Avenue, Green Park. The town centre also saw strong levels of take-up in Q1, boosted by the DWP’s 32,887 sq ft lease at Kennet Place and a string of smaller deals involving fitted space. One of the market’s largest strategic requirements was satisfied in late Q2, with Amazon agreeing to take 50,000 sq ft at Green Park. That said, the recent recovery of demand is focused at the smaller end of the market, with nimbler businesses already giving thought to their future workplace strategies, while corporate requirements in the 20,000 sq ft to 80,000 sq ft bracket are notably thin at present.
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