The initial extent of the pandemic and subsequent lockdown is reflected in the Q1 2020 GDP figures with the UK economy shrinking by 2.2%, the largest fall since 1979. With many occupiers grappling with the huge impact of COVID-19 to their business, it is no surprise requirements have been put on hold and decisions deferred. We foresee that the end of the furlough scheme and the longer-term economic impact of COVID-19 will inevitably lead to job losses and business administrations, which will result in some businesses rethinking property requirements.
Despite this however, we do not envisage the ‘end of the office’. Rather, the structural changes that have been present in the office sector for some time are being accelerated like, the consolidation of office footprints, a move towards greater flexibility and a focus on health and wellbeing. We believe there will be a real focus from occupiers on ensuring the role of the office is maximised and fit for purpose, rather than simply being a base for administrative tasks.
After a subdued Q1 2020, leasing volumes reached just 260,628 sq ft in Q2 2020, signalling the lowest quarterly take-up volume on record. This brings H1 levels to 678,422 sq ft, 45% below the same period last year and 54% below the five-year H1 average. Whilst all size bands recorded a significant drop in activity, there were no transactions in upper two size bands with largest letting being 42,480 sq ft compared to 100,000 sq ft last year. However there have been three deals recorded over 20,000 sq ft in H1 2020.
The largest deal of the quarter was Hewlett Packard’s 31,484 sq ft letting at The 210 Building, Winnersh Triangle, Reading. Interestingly, the three largest deals of the quarter are to Technology companies.
Vacancy rates remain low, particularly for Grade A product reaching 7.4% in Q 2020, a marginal rise on the previous quarter (7.3%). This coupled with a restricted development pipeline will minimise any falls in prime rents. Upward pressure on the vacancy rate however is likely to come in the form of second hand tenant space as businesses review headcount and rationalise office footprints. We do however, expect rent-free periods to move out over the next year.