Boost for Central London's Office Leasing Market

17 Oct, 2011, London

Q3 2011 Central London take-up was 2.2m sq ft, the highest quarterly total of the year to date
TMT sector continues to drive leasing in the West End, accounting for over one third of take-up
City & Docklands take-up significantly higher than the previous quarter
Despite the weak economic conditions and uncertainty about prospects for recovery, Q3 2011 saw good leasing activity in Central London, according to global property consultant Cushman & Wakefield. A total of 2.2m sq ft of office space was leased across the West End and City & Docklands. This is up from Q2 2011 when take-up totaled 1.43m sq ft. However, the figure is down year-on-year (2.63m sq ft in Q3 2010).

In the West End, take-up for the year to date now stands at 2.3m sq ft, following a further 806,085 sq ft of lettings in Q3 2011. Leasing activity is 15% down on the same period in 2010, as the global economic turmoil filters through to all industries. The TMT sector continues to drive the market, accounting for over one third of take-up in 2011 so far. Annual take-up is anticipated to be around the five-year average level.

There were two major pre-lets in the West End in Q3 2011: to Debenhams at Regent's Place (154,000 sq ft) and to Camden Primary Care Trust at King's Cross Central (150,000 sq ft). In Mayfair & St James's just one deal larger than 10,000 sq ft has been signed over the last year at over £90.00 psf.

West End demand stands at 4.3m sq ft, up from 3.1m sq ft at the start of the year. TMT companies represent just under half of all active demand. Of this, the media sector accounts for over 1m sq ft of enquiries, while technology companies require a further 826,000 sq ft. A number of companies are considering longer-term moves, with lease events remaining the main trigger for potential acquisitions.

Supply in the West End has fallen 25% since the beginning of 2011, to 4.7m sq ft from 6.2m sq ft, which equates to a vacancy rate of 4.6%. Around 220,000 sq ft of new space was completed in five buildings in Q3 2011, including 1 Kingsway (105,000 sq ft), the largest scheme to complete.

There is just less than 1.8m sq ft of office space currently under construction in the West End, with 425,000 sq ft due for completion in Q4 2011. Over a million sq ft of space is expected to be completed in 2012, of which less than half will be in three new schemes. The most space due for completion in 2012 is located in Victoria, where a total of 450,000 sq ft is due onto the market, followed by Mayfair & St James's (291,000sq ft), where 165,000 sq ft will be delivered at Park House. New starts in Q3 2011 amounted to 173,000 sq ft, and refurbishments dominate, accounting for 138,000 sq ft. A further increase in prime rents was recorded, reaching £102.50 per sq ft. This equates to annual growth of 14%.

Guy Taylor, Head of West End Office Agency at Cushman & Wakefield, said, "A lack of good quality space is supporting rental growth in key submarkets, in particular in Mayfair & St James's, Soho & Covent Garden and Victoria, where rents have seen double-digit growth over the last 12 months. Prime rents will continue to come under pressure and further rental growth is anticipated, although growth will not be widespread across all submarkets and the pace of increase is forecast to slow into 2012."

City & Docklands take-up was significantly up in Q3 2011, to 1.4m sq ft from 806,085 sq ft in Q2 2011, on the back of several larger deals. However, one strong quarter is not sufficient to call a recovery in the market and the underlying trend continues to be one of more constrained activity. 2011 take-up to date has been subdued with 2.8m sq ft let, around 45% down year-on-year. Annual take-up is anticipated to be less than 4m sq ft, which could be the lowest level since 2003. There are currently two big pre-lets under offer, by AON and CMS Cameron McKenna, which would boost year-end take-up if they complete soon.

There were four deals in excess of 50,000 sq ft signed in the City & Docklands in Q3 2011. Two of these were for more than 100,000 sq ft: Trowers & Hamlins leased 101,000 sq ft at 3 Bunhill Row; and the European Medicines Agency took a pre-let on 265,887 sq ft at 25 Churchill Place, Canary Wharf. Lease re-gears and renewals account for a substantial part of the market, the largest of which was PWC signing on 156,000 sq ft at Hay's Galleria, London Bridge City.

In the City & Docklands, active requirements stand at 4.9m sq ft, a quarter-on-quarter increase. A number of new enquiries emerged over the summer, and both financial services and TMT companies saw a rise in total requirements over Q3 2011. Many of the large active enquiries in the market are longer term requirements and are likely to be considering a pre-let due to limited choice.

Supply in the City & Docklands stood at 12m sq ft at the end of Q3 2011. There is just over 4m sq ft currently under construction. Just over half a million sq ft of space was completed this quarter, including 386,000 sq ft at Cannon Place. The vacancy rate remains below the 10-year average at 7.8%.

The City & Docklands development pipeline is constrained, with space under construction a million sq ft below the five-year average. Over a million sq ft of space is due to complete in 2012, of which almost half will be available in the Shard. Schemes due to go ahead shortly include; 1 London Bridge (96,500 sq ft) and Cottons Centre (156,000 sq ft), which will both undergo a major refurbishment for completion late 2012/early 2013: and Aldgate Tower, on which development is soon to start speculatively.

Prime rents remained stable at £55.00 per sq ft and there has been no uplift in rents in any City & Docklands submarket. Average rental growth of just 3% has been recorded in the year to September 2011, significantly down on the 21% growth seen in the previous 12 months.

James Young, Head of Cushman & Wakefield's City office, said, "Occupiers in general remain cautious and a number of decisions have been delayed. With the current economic uncertainty, 2012 will see take-up significantly below average. A number of planned schemes are likely to get pushed out and pre-letting is still a major requisite for most schemes. Prospects for demand look more positive looking further out, due to the volume of lease expiries beyond 2013."

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