A lack of available prime office space in Central London will lead to an increase in pre-let activity, according to the latest research by CB Richard Ellis (CBRE).

A lack of available prime office space in Central London will lead to an increase in pre-let activity, according to the latest research by CB Richard Ellis (CBRE).

Historically, the incidence of pre-lets has coincided with periods of low availability. This is a pattern that has recurred across the Central London market over the last 25 years as take-up strengthens and availability tightens, pre-lets become more common.

In the wake of the financial de-regulation that followed 'Big Bang', take-up rose sharply and availability fell quickly and pre-letting increased - ranging from 20% to 33% of take-up over 100,000 square feet (9,300 m2). This was replicated again in 2000-01 when the proportion of pre-lets rose to 33% and then 57%. In contrast, there have been just eight pre-let deals over 100,000 sq ft in the current cycle, the contribution from pre-letting to overall demand has been very subdued and accounted for only 10% of take-up since Q3 2009.

'The story of the current cycle has been one of falling supply and rising rents with leasing volumes in 2010 having outstripped those from the previous year by a wide margin,' said Digby Flower, executive director of CBRE's City Agency. 'Although pre-lets have only played a small part so far, several factors are expected to drive their rising volume over the next two years. With supply being squeezed further, an inadequate development pipeline and rental growth set to continue, pre-letting may be the only option open to a significantly sized tenant.'

Availability levels of prime commercial stock have fallen 35% since the most recent market peak in 2009 and remain considerably lower than the long-term average. This pressure on space is further compounded by a lack of activity in the development pipeline - at present there is only 6.5 million sq ft of space under construction in Central London, which is unable to satisfy the large number of corporate occupier requirements which will come to market before 2015.

Without the promise of speculative development in the coming months, completions in the capital are anticipated to be at their lowest levels for 15 years in 2011/2012, which, in turn will fuel interest in the pre-let market.

The City and Docklands markets are expected to lead the large pre-let revival, however, whilst the West End market has traditionally seen little pre-let activity, there is significant scope for this to change in the forthcoming cycle, with Paddington and King's Cross as potential opportunities.

'The intense squeeze on supply that we are currently experiencing in the Central London market will inevitably lead to a rise in pre-let activity. In the absence of readily available development finance, pre-let agreements are beneficial both for the developer, as they reduce the risks associated with vacancy, and providing the impetus to kick start a scheme, as well as for the occupier, giving them the opportunity to influence the layout and design, giving them greater flexibility, as well as reducing their costs,' Flower added.