Commercial Property Market Review – March 2022
Prime space snapped up by legal firms
More than one million sq. ft of Grade A office space was taken up by the legal sector in 2021, highlighting the importance of the ‘best’ space in the post-pandemic landscape.
London’s resilient legal sector has enjoyed strong revenue and increased headcount over the last year, which has driven demand for office space. The sector’s 2021 office take-up represents the strongest leasing activity of prime space for law firms on record.
International law firms have committed to the UK, with many choosing London as their European headquarters. Notable deals include two by American multinationals; Latham & Watkins, the second highest grossing law firm in the world, acquired 200,000 sq. ft at 1 Leadenhall EC3, while Baker McKenzie, the fourth largest by revenue, took 152,690 sq. ft at 280 Bishopsgate EC2.
Analysts expect the sector to acquire more of the prime space over the coming years. According to Savills, between 2022 and 2026, there are over 5.3m sq. ft of lease events within the legal sector in the City of London, of which 1.8m sq. ft have re-geared or committed to new office space.
Impact of Ukraine crisis on commercial property
Russia’s invasion of Ukraine has horrified people around the world and shaken markets and financial systems. What impact will it have on commercial property in the UK?
Directly, analysts think the impact will be limited. Russian investors are not major players in the UK commercial market, accounting for only 0.3% of purchases since 2015, according to Property Market Analysis LLP.
One view is that the Ukraine crisis might shift investor demand away from real estate in central Europe, which could benefit markets perceived to be safe havens, such as the UK and Switzerland.
Indirectly, however, the invasion could have a greater impact. Although Russia’s share of global gross domestic product (GDP) is only 1.7%, the country is a major energy producer. Since the start of the invasion, prices across a range of commodities, including oil and gas, have increased sharply.
Legal & General expect real estate impacts to become apparent in the longer term. They note two likely effects, both relating to energy and the green transition; a greater focus from occupiers on energy consumption in buildings and more attention paid by governments to energy security.
Yields back at pre-pandemic levels
The positive investment trend of Q4 2021 has spilled into 2022, according to the latest Savills Market in Minutes, with commercial property investment totalling £6.9bn in January and February, 35% above the same period a year earlier.
The UK average prime yield is now 4.84%, a level not seen since October 2019. The Savills report expects positive sentiment and yield hardening to continue in half of the sectors it monitors. Further downward pressure is expected in prime logistics, high street retail and shopping centres, with repurposing opportunities especially likely for shopping centres off the back of prime demand.
The return of larger deals, noted in Q4 2021, also continues: two assets over £100m were traded in December. In contrast, no deals over £100m were made in the whole of 2020.
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