London 6 March 2013, The combination of increasing rents for prime Central London Grade A office space and the hike in business rates since the 2010 revaluation, is encouraging a significant number of West End tenants to relocate to more affordable peripheral areas such as Marylebone, Soho, Victoria and Paddington as well as The City of London and City fringe.
This market trend forms part of the findings of the “Commercial Edge London”, a research document prepared by national property consultancy Carter Jonas. Published today, the report also provides an analysis of the trends in rents and rent free periods in the Central London office market.
According to the report, rents for new Grade A office space in prime locations such as Mayfair and St James’s have risen by up to 33 per cent since the end of 2009, the generally acknowledged bottom of the London office market, following the international banking crisis, with rents for prime properties now back over £100 per sq ft per annum.
Michael Pain, head of Carter Jonas’ London Tenant Representation Team, attributes the increase in rents to the lack of supply of well located Grade A office space that is available to let in Central London. “There was a virtual absence of speculative office development starts between 2008 -2010; a consequence of the collapse in tenant demand and the development funding drought”, comments Pain.
Prime City rents are up 22 per cent since the third quarter of 2009. However, prime West End rents are now an unprecedented 80-88 per cent higher than their City equivalents – reflecting the different supply and demand dynamics of the two sub-markets.
The marked disparity between West End and City rents has catalysed the trend for tenants in cost sensitive business sectors such as the media and business services sectors to migrate to lower cost City fringe areas such as Farringdon, Clerkenwell, Shoreditch and secondary City / edge of City locations such as Blackfriars, St Paul’s, Liverpool Street, Finsbury Square, Tower Hill.
According to Carter Jonas’ research, the trend for occupiers based in high cost locations in the West End seeking more cost efficient premises in the east is likely to increase as low vacancy levels, rising rents and business rates increases of up to 50 per cent, following the 2010 rating revaluation, conspire to push operating costs to uncomfortably high levels for many businesses. As a consequence, Carter Jonas’ Research Team believes that rents for well located, good quality, refurbished office space in the City and City fringe are likely to rise by circa £1.50 - £2.50 per sq ft pa over the next 12 months.
Of all the Central London office sub-markets, it is the Midtown office market that has witnessed the largest increase in rents since the third quarter of 2009 – up to 37.5 per cent - due to low vacancy levels and the completion of landmark office developments such as Central St Giles and One Kingsway which have set new rent benchmarks for the area.
In the South Bank area, the recently completed Shard is similarly likely to set new rent benchmarks - £65.00 - £70.00 per sq ft per annum for the upper floors of the building, reflecting its iconic status.
Speculative office developments that were implemented during 2011, following the resumption of rental growth in many of the Central London office sub–markets, will be completing during the second half of 2013 and the first half of 2014.
“However,” suggests Pain, “the volume of new office space that will be delivered into the market is unlikely to relieve the upward pressure on rents significantly if tenant demand returns to its long term average, assuming that sustained economic growth is restored during the next few quarters.”
In the medium term, and despite current, weak, tenant demand, the Carter Jonas Research Team’s view is that prime office rents for well located refurbished and new Grade A space in Central London will rise by an average of 5 - 10% by 2015 due to ongoing supply – side constraints, which are unlikely to improve appreciably in the next few years.
Carter Jonas’ research suggests that in locations such as Mayfair, St James’s, Marylebone, Soho and South Bank, where office vacancy levels are particularly low, rental growth is likely to be more pronounced, perpetuating the trend for tenant demand to spill over into lower cost neighbouring areas.
Notwithstanding that the insurance sector has been the main driver of demand in the City over the last 12 months - witness the pre-lettings at The Leadenhall Building / the “cheese grater” and 20 Fenchurch Street / the “walkie talkie” building which have been dominated by insurance companies - and acknowledging the contribution made by the technology, media and telecoms sectors to letting activity in Midtown and the City fringe, collectively these sectors are unlikely to push demand towards it’s long term trend. The pattern of demand for office space across most of the Central London office sub-markets is likely to remain patchy at least for the next 12 months until there is a resumption of sustained economic growth and, importantly, an increase in financial services employment which has been the mainstay of occupier demand in the Central London office market.
“Cloud computing, advances in mobile technology, and greater use of electronic filing, coupled with changes in working practices such as “hot-desking” and “home working” are having an impact on the quantum of floor space required as businesses seek ways to reduce their operating costs and reduce the amount of floor space they occupy.
“We expect this trend to continue providing that business efficiency isn’t compromised,” adds Pain.