Central London Net Effective Rents Monitor Q2 2024

The Carter Jonas Net Effective Rents Index

Our Central London Net Effective Rents Monitor illustrates the combined impact of changes to both prime 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.

Central London trends

• Vacancy levels for sustainable, grade A office space remain historically low across much of the West End, Midtown, South Bank and City of London submarkets, and this has helped to maintain upward pressure on rents. As is usual at this stage of the cycle, rental growth has been focused on headline rents, which have continued to increase in some districts, although we have also seen some limited reductions in typical rent free period incentives.

• Overall central London prime headline rents rose by 0.4% in Q2 2024, bringing growth over the last 12 months to 4.2% (a weighted average across all of central London’s districts).

• The prime net effective rent (assuming a five-year lease) rose by a slightly stronger 0.5% in Q2 2024, taking the annual increase to 4.4%. For 10-year leases, the quarterly increase in the prime net effective rent was 0.7% in Q2 2024, with an annual rise of 4.6%.

• Prime central London headline rents have now surpassed their previous pre-pandemic peak by 6.5%, whilst five-year net effective rents are 4.1% higher. The trend of headline versus net effective prime rents over the current cycle is illustrated in Figure 1.

• It is important to note that the overall central London trend masks considerable variations by submarket and district.

Recent trends by submarket

• Occupier demand is firmly focused on prime space in those submarkets with the lowest availability, driven by an increasing desire to be located as centrally as possible to access London’s highly skilled labour pool – thereby prioritising recruitment and retention policies over real estate costs.

• The West End, and the core districts of Mayfair and St James’s in particular, continues to be characterised by historically low levels of grade A space, which is underpinning rental growth. Likewise, Midtown now has a significant shortage of grade A stock. This has continued to impact rental performance, and the increase in prime central London rents is mainly being driven by these submarkets.

• Midtown saw the strongest overall growth in prime net effective rents in Q2 2024, with a rise of 1.5% (five-year lease) during the quarter, whilst the West End rose by 0.8%. For a ten-year lease, growth over the quarter was slightly stronger at 2.0% in Midtown and 1.2% in the West End. Over the last year (to Q2 2024), prime net effective rents have increased by 4.7% in Midtown, and by 7.9% in the West End, assuming a five-year lease.

• As Figure 2 illustrates, the West End has outperformed the other submarkets by a significant margin since the bottom of the cycle in mid-2021, with the five-year net effective rent having increased by 24.1%. Midtown has also performed strongly, with the five-year net effective rent rising by 14.4%. The West End is now 14.1% above its pre-pandemic peak, with Midtown 5.5% above it.

• The City of London and City fringe submarkets have higher rates of Grade A floorspace vacancy than the West End and Midtown, offering more choice to footloose tenants. Since the bottom of the cycle, the City of London has seen prime net effective rents rise by 11.1% (five-year lease). Over the 12 months to Q2 2024, the increase was 3.8%, with a modest 0.3% rise during Q2 2024. Overall, City of London prime net effective rents are now 2.4% higher than their previous pre-pandemic peak (five-year lease).

• In contrast to much of central London, East London (Stratford and Canary Wharf / Wood Wharf), the north and east City fringes (Shoreditch and Aldgate East), and West London (Hammersmith and Chiswick) continue to suffer from weak demand and the preference of many businesses to focus their property searches in more central locations. Docklands / East London has seen only limited movement in prime net effective rents since the pandemic low, rising by just 4.1% (five-year lease), and this submarket has still not recovered to its pre-pandemic peak (standing at 6% below this level).

Trends by district

• We now look at the individual districts that make up central London’s submarkets. Mayfair and St James’s has been the standout performer since the pandemic low in 2021, with the prime net effective rent rising by 28.7%, followed by Victoria and Westminster (20.6%), Soho (17.4%) and Spitalfields (16.6%).

• Recently, rental growth has been focussed away from the core districts, as severe supply shortages in locations such as Mayfair and St James’s are causing demand to be displaced to surrounding areas, with locations along the Elizabeth Line benefitting in particular. Figure 3 shows the 10 districts that have seen the strongest growth over the 12 months to Q2 2024. Victoria / Westminster, a key overspill location for the core Mayfair / St James’s market, has seen the prime net effective rent rise by 19.4%, and similarly, Soho has seen a rise of 13.2%.

• Insufficient speculative schemes are coming on stream to meet demand over the next 12 months, and much has been let prior to completion, and so upward pressure on rents is likely to be maintained. Those buildings coming on stream in the near term across the core West End, Midtown, and City submarkets should let rapidly (assuming they meet occupiers’ requirements in terms of quality and sustainability).

Core districts

• Figure 4 illustrates prime net effective rents (assuming a five-year lease) across the five ‘core’ central London districts, comparing Q2 2024 with the same quarter last year.

• The prime net effective rent in Mayfair has increased by 7.4% over the last year to £120.75 per sq ft per annum, with the South Bank increasing by 6.9% to £64.00 per sq ft per annum. Holborn has seen a modest increase of 3.4% to £62.00 per sq ft per annum. The core City of London (Bank, Leadenhall Street), and Docklands (Canary Wharf, Wood Wharf) districts have seen no change over the last year, to stand at £60.00 and £41.75 per sq ft per annum respectively.