Growth for the key Information and Communication sector is expected to accelerate to 6.5% in 2022, up from 4.3% in 2021. That is lower than the pre-Covid average of 8.0% per annum. Nevertheless, this will be a welcome boost to London’s office market, as this sector typically encourages staff interaction and brainstorming in the workplace.

Employment in London is forecast to rise by 142,000 jobs to just over six million posts in 2022, which is marginally lower than the pre-Covid (2019) level. Over 48,000 of the new jobs are expected to be traditionally office-based roles. The unemployment rate is forecast to decline from 6.2% in 2021 to 5.5% in 2022.

Looking at demand drivers in a broader sense, Oxford Economics figures suggest that information and communication services are most likely to drive growth in demand for London office space next year. Employment in the sector is expected to grow by 4.4% in London during 2022 after having fallen during the pandemic, which is slightly ahead of the expected employment growth for professional services (1.5%) and financial services (0.8%).

In addition, regulatory changes from the FCA introduced in December 2021 are ostensibly aimed at making London more attractive to growth markets such as fintech, green finance, and even digital currencies as the capital forges a new path after Brexit.

Those strategies will, of course, require various ‘lead-in’ times for provision of adequate office space – as we have seen in major recent lettings in the capital. For example, Allen & Overy signed for upwards of 250,000 sq ft at 1-2 Broadgate, EC2, in anticipation of moving in late 2026. Whereas Facebook took the opportunity to acquire 310,000 sq ft of readily available new-build space at 1 Triton Square, NW1, while various deals also came through at the recently completed 22 Bishopsgate, EC2.

Those facets are likely to underpin leasing demand again during 2022 – particularly on higher-grade, sustainable space which can best act as a complement to increasingly sophisticated home-working setups, as well as satisfying broader corporate aims around talent retention, productive task-based working, and decarbonisation.

New-build completions such as 8 Bishopsgate, EC2, The Rowe, E1, and Arbor, SE1, are most likely to satisfy immediate requirements for communal office space in this regard, while projects tabled for a 2022 construction start including 105 Victoria Street, SW1; City Place House, EC2; and EDGE London Bridge, SE1, may be the developments of choice for occupiers looking further along the horizon.

The current development pipeline is relatively abundant at 30% pre-let, but with letting activity only just getting back to more ‘normal’ levels, we feel that even with speculative construction starts on the aforementioned developments, the continuation of strong occupier appetite for best-in-class space in London should propel this higher by the end of next year. The lack of ‘in-situ’ high-grade space is another factor to consider, with only 28% of current standing availability coming in ‘Grade-A’ buildings.

Another aspect which will be impactful in 2022 is the opening of Crossrail – which should enhance localised demand after what has been a significantly dislocated letting market in the run-up to its debut. Some markets which will benefit from the increased connectivity of the Elizabeth line are also experiencing a supply crunch when it comes to Grade-A stock.

For example, the Bloom building adjacent to Farringdon Station is now almost entirely let to Snapchat, while most of the space in Paddington Square is reportedly under-offer, meaning that there is an imminent confluence of factors on connectivity and supply constraints which should facilitate growth in occupier interest and rental tone in these locations across 2022.

London’s retail picture is obviously incredibly varied, but overall vacancy is in the region of 18%. The city has benefitted from a number of openings across the retail and leisure universe. Eataly opened next to Liverpool Street station during the course of 2021. Some of the more recent noteworthy openings have included Astrid & Miyu opening a flurry of stores including on the King’s Road, Coal Drops Yard and Soho; Bucherer opening a new flagship in Covent Carden, while Cubitts, Floozie, Olive & Jennings, Vashi, Nehuaus, Free People and Matchless have all opened high profile stores during the course of 2021. Gymshark will open its first UK store on Regent Street 2022 as will US luxury furniture retailer, Restoration Hardware. In some cases, these retailers have and will continue to benefit from reduced competition and more favourable rental conditions.

The estate-managed areas of central London will continue to perform well. Oxford Street’s fragmented ownership and lack of investment, in the face of limited demand and ongoing development is an issue. While the street remains the most visited retail destination in Europe, footfall numbers have been significantly lower than pre-pandemic levels, even during periods when restrictions were eased – with the missing office workforce partly to blame. 2022 will see an increasing number of landlords put greater focus on their retail mix (for those who haven’t previously) – and the ability to attract people to their stores.

The oversupply of retail space continues to drag down rents, with prime rents falling at least 5% during the course of 2021. Our forecasts suggest that the falls in rental values will slow significantly during the course of the year. However, there is likely be discrepancy across markets, with localised vacancy playing a big part, as well as delayed distress, pushed back rent arrears and reduced office worker footfall all impacting the sector’s risk profile.

With its status as a global city London’s hotel sector was more greatly impacted by Covid-19 due to international travel restrictions. The return towards the end of 2021 of a partial return of international travel and major events, saw a strong recovery in occupier levels. The recovery of the sector will likely accelerate throughout 2022 as countries ease out of new restrictions brought on by the Omicron variant.

Those occupiers who rely on market share – particularly retailers and 3PLs are willing to pay higher than average rents in order to continue growth plans. The Mid-Box market continues to see strong and diverse levels of demand. We will see an increase in the demand for dark grocery space increasing off the back of the growth in rapid grocery delivery services such as Getir, Gorillas, Gopuff, Zapp and Jiffy. Their business model aims to guarantee delivery within a 10–15-minute window, leading to a demand for space to house their products in urban areas. We have already seen this in London and the South East – with Getir taking small units at Slough Trading Estate and Segro Park, while Gorillas have signed an agreement to use Tesco facilities.

London’s small batch manufacturing base continues to be an important and growing part of the economy – particularly in Outer London, with areas such as Tottenham, Staples Corner, Park Royal and even the Old Kent Road particular hotspots. The growth in demand from Film and TV studios, particularly for digital content, strengthens London’s reputation as a home for filming, with Netflix going to Enfield the most recent high-profile announcement.

The tight supply will continue to put upwards pressures on land values – with industrial land prices competitive against all other sectors, underpinning appetite for speculative development and intensification in relevant locations. Some markets could see a repositioning of their ‘industrial, manufacturing and distribution space’ as landlords look to maximise values, particularly in strategic industrial land (SIL) locations.

The latter of these factors will continue to be a feature in 2022 and act as a ceiling on house price growth. There is more of a question about the former and to what extent demand for more urban locations will bounce back. Prior to the Omicron wave at the end of 2021, house price growth in the more central markets in the capital was accelerating as were rents, pointing to a recovery in demand. We expect this to pick up again in 2022 once the Omicron impact has subsided.

The other big factor for the city is ongoing undersupply and indeed this picture has deteriorated with housing starts in 2021 well below pre-pandemic levels. This, alongside the affordability constraints of accessing homeownership and the return of demand for urban living mean the rental growth outlook is very strong and ahead of the wider UK. House price growth will be much more moderate and behind the wider UK but will be supported by the weak supply picture. Well-located developments, especially with access to green space will see particularly strong demand.

London’s highest value central markets will behave differently as they are less affected by affordability constraints, with mortgage finance playing a smaller role for equity rich buyers. Combined with a boost from international demand, which has been limited by travel restrictions, this will help the highest value central markets outperform wider London.

London’s strong rental growth outlook means investor appetite for BtR development opportunities and operational assets will be strong in 2022. The picture of a continued shortfall in housing delivery will underpin long term confidence and demand for the sector. The data on performance of operational assets during the height of the pandemic was relatively encouraging and investment into the sector was strong in 2021, with a number of large funding deals closing.