Central London Net Effective Rents Monitor Q1 2024

The Carter Jonas Net Effective Rents Index

Our Central London Net Effective Rents Monitor illustrates the combined impact of changes to both headline rents and the typical length of rent-free periods across 22 central London districts. 

The Index also reflects different lease lengths by providing analysis of five and ten year leases, which can have a significant impact on the net effective rent for each district. 

Note: the impact of the timeframe for the ingoing tenant to carry out its fitting out works has not been factored into the Carter Jonas net effective rent analysis simply because the timeframe will be influenced by the quantum of space to be leased.

Recent trends by district

Take-up in the central London office market continues to be resilient, albeit below long-term trend levels. This is set against an extremely restricted supply of high quality space, which is where demand is now almost entirely focussed. However, the supply shortage is far from uniform across central London’s districts, and this is leading to significant variations in rental growth performance.

Where supply pinch points for top quality space are severely limiting choice for occupiers, landlords are taking an increasingly bullish view of the rental levels at which they can advertise space. In these locations, we are now seeing notable upward pressure on prime headline rents, which increased in 10 out of our 22 monitored districts during Q1 2024.

As is usual at this stage in the cycle, the imbalance between supply and demand is being reflected in rising headline rents rather than reduced rent free incentives. Indeed, we have not witnessed any material change in rent free incentives over the last year.

Rental growth is most notable in the West End and Midtown but is also becoming increasingly evident in the City of London. Growth this quarter has been focussed away from core districts, as severe supply shortages in locations such as Mayfair and St James’s are causing demand to be displaced to surrounding areas. This ripple effect has been a key driver of rental growth in districts such as Victoria / Westminster and Soho.

Following two consecutive quarters of growth, Q1 2024 saw no change to prime headline rents in Mayfair / St James’s, which stand at £145 per sq ft per annum. However, prime rents have increased by 16% over the last year, the highest of any central London district. 

Soho has seen the second-highest rate of prime rental growth in central London over the last year at 13.2%. The prime headline rent now stands at £107.50 per sq ft per annum compared with £105 per sq ft per annum in Q4 2023 and £95.00 per sq ft per annum a year ago.

Meanwhile, Victoria / Westminster has seen its headline rent rise to £87.50 per sq ft per annum, compared with £85 per sq ft per annum in Q4 2023, although nearly £100 per sq ft is being quoted for exceptional space such as upper floors with terraces. This district has seen the third highest growth in central London over last year, at 12.9%. 

Paddington is also benefiting from overspill from core locations, and has the additional advantage of an Elizabeth Line station, which continues to have a positive effect on demand and rents. The prime headline rent is now £85 per sq ft per annum, compared with £82.50 per sq ft per annum in Q4 2023, and £77.50 per sq ft per annum a year ago. This equates to a prime rental growth rate of 9.7% over the last year.

Elsewhere, locations such as Farringdon also continue to benefit from the Elizabeth Line effect. Here, the prime headline rent has increased from £85 per sq ft per annum in Q4 2023 to £90 per sq ft per annum in Q1 2024. Indeed, the upper floors of the highest quality space, located close to the station, are now seeing considerably higher rents than this, a good example being the JJ Mack Building, where £115 per sq ft per annum is being quoted on upper floor accommodation. 

The South Bank saw its prime headline rent increase from £75.00 per sq ft per annum in Q4 2023 to £77.50 per sq ft per annum in Q1 2024. This marks a 6.9% increase compared with the £72.50 per sq ft per annum being achieved this time last year.

Shoreditch is also benefitting from the ripple effect, with demand picking up sufficiently for landlords to start raising rents, partly reversing the modest fall in prime headline rents witnessed during 2023. The prime headline rent currently stands at £70 per sq ft per annum, compared with £67.50 per sq ft per annum in the second half of last year, although still below the previous £72.50 per sq ft per annum reached in early 2023.

In Midtown, Holborn saw its prime headline rent rise from £72.50 per sq ft per annum in Q4 2023 to £75 per sq ft per annum in Q1 2024. Rents in Bloomsbury also moved upwards in Q1, from £85 to £90 per sq ft per annum.

Rents were stable in the City of London core around Bank and Leadenhall Street during Q1 2024 at £75 per sq ft per annum. However, rents are rising for the top floors of tower buildings. At 8 Bishopsgate, for example, the upper floors are understood to have been let at headline rents in excess of £110 per sq ft per annum during the last two quarters, reflecting the limited supply for this type of space. 

Prime headline rents have been stable over the last year in Docklands / East London, with Canary Wharf / Wood Wharf remaining at £55.00 per sq ft per annum. This reflects the much greater level of immediately available quality space.

Figure 1 illustrates rental growth in the fastest growing 10 central London districts. 

Recent trends by submarket

The combined changes at district level mean that prime headline rents increased in the City of London, Midtown, and the West End submarkets during Q1 2024, by 3.5%, 2.3% and 1.2% respectively. Only the East London / Docklands submarket saw no change. As there was no change to typical rent free periods, these figures also reflect prime net effective rental growth.

Since the bottom of the cycle in 2021, the West End submarket has seen extremely strong rental growth, driven by the Mayfair / St James’s market, with prime headline rents rising by 14.1%, and prime net effective rents rising by 23.1% (assuming a five-year lease) in the period to Q1 2024.

Prime headline rents in the City of London submarket have increased by 6.6% over this period, with the net effective rent rising by 10.8%. For Midtown, the equivalent figures are 4.7% (headline) and 12.7% (five-year net effective). Figure 2 illustrates the trend in net effective rents by submarket over the cycle.

Overall Central London trends

Prime headline office rents across central London increased by 2.1% during Q1 2024 and are 4.2% higher than a year ago. With no change to typical rent free periods the net effective rents have increased by the same amount.

Compared with the bottom of the current cycle in Q1 2021, prime central London headline rents have risen by 7.1%. The impact of reductions in typical rent free periods in the early phase of the recovery means that prime net effective rents are now 12.5% higher than Q1 2021 assuming a five-year lease, and 10.1% higher assuming a 10-year lease.

As Figure 3 illustrates, overall central London prime rental levels have surpassed their mid-2020 pre-pandemic peak by some margin. As at Q1 2024, headline rents are 6% above their Q1 2021 level, with net effective rents 3.5% higher (for both five and 10-year leases).

Outlook

Letting activity is likely to remain below trend over the next two quarters, reflecting continued (albeit weakening) business downsizing as well as political uncertainty associated with the US and British general elections. 

Given the limited development completions pipeline, the next 18-24 months will be very challenging for footloose tenants seeking grade A space that meets high standards for sustainability, design, and facilities.

However, developer optimism has risen noticeably in reaction to the shortage of high quality grade A supply relative to demand, increased confidence around future occupational levels, and recent strong prime rental growth rates in many locations. In addition, recent high rates of tender price inflation are now easing significantly, assisted by increased competition amongst contractors, and there is greater optimism that financing costs will reduce over the next year.

This renewed confidence has translated into a rise in planning applications, and a wave of schemes has been getting under way in recent months. However, the supply imbalance will not ease until these schemes complete from 2026 (refurbishments) and 2027 (new builds).

Although development activity is rising, it will nonetheless remain relatively restrained, and we do not foresee a situation of oversupply (as has happened in some previous upturns), given the robust level of pent-up demand. Indeed, just a handful of significant lettings could absorb a significant proportion of this new supply.

The imbalance between supply and demand will continue to be reflected in rental growth rather than incentives. We expect further rental growth for the highest quality grade A space this year across those districts with the greatest shortages of supply, most notably in the core West End, and those areas benefitting from overspill. Rent free period incentives should remain broadly static, although some prime districts of the West End where quality supply is particularly low could see a modest contraction.

Table 1 – Prime headline and net effective rents, core central London Districts
(£ per sq ft per annum )

Source: Carter Jonas