London office market on its way out of recession as occupiers jostle for position

28 Sep, 2009, Warsaw

The London office market will have had its best quarter since the collapse of Lehman Brothers according to statistics from real estate advisor Cushman & Wakefield, due to be published on 1st October.

In the three months to end September, take up of office space across the capital’s main West End, City & Docklands markets will have increased by 64% on the second quarter to 1.86 million sq ft. The figure is more than double the take up seen in the first quarter of the year when only 716,000 sq ft of space was acquired by companies, the lowest level on record. In the City, take up of 1.35 million sq ft has been boosted by the recent letting of Watermark Place, EC4 to Nomura, and is higher than the quarterly 10 year average of 1.14 million sq ft.

Other major lettings in the third quarter include Aberdeen Asset Management taking 71,000 sq ft at Bow Bells House, EC4, 37,000 sq ft to Bain Capital at Devonshire House, W1, and EDF Energy leasing 37,000 sq ft at Cardinal Place, Victoria Street, SW1.

Rents have also reached their lowest point in the cycle. Prices on prime space – the benchmark for the market – have now bottomed out at £42.50 per sq ft in the City and £75 per sq ft in the West End. Cushman & Wakefield now expects prime rents to begin to increase during the latter half of 2010 providing a boost for landlords and developers and meaning tenants have a narrowing window of opportunity to secure space at the lowest prime rents in a decade. With confidence returning, tenants can also expect to see less generous incentive packages from landlords.

Although increased take up and stable rents mark the beginning of the climb out of the London’s office recession, the supply of office space on the market has increased again with 20 million sq ft now available across Central London, a vacancy rate of 8%. However, this amount falls short of the peak levels of availability in the early 1990’s and 2003-5 (the peak in June 2004 was 27.2 million sq ft).

The development of new office space has also come to a complete halt, with Q3 seeing no significant development starts of speculative space being recorded across the capital This will help to redress the supply/ demand imbalance further and will drive an improvement in deal terms from 2010. In the West End a total of 2.2 million sq ft of speculative space is currently under construction, some 670,000 sq ft less than was being built at the same point in 2008. As a proportion of stock, the development pipeline is now at its lowest level since June 2006.

In the City, speculative space under construction fell again in Q3 with the supply pipeline offering very little beyond 2010; there is currently 4.5 million sq ft under construction. Of the 1.6 million sq ft completed in Q3, over half is already pre-let to tenants.

James Young, head of Cushman & Wakefield’s City office, said: “There has been a real sea change in sentiment in the market over the last three months. We have seen a pick up in activity from occupiers; this improving demand, coupled with a constrained supply pipeline beyond next year, means that the bottom of the market for prime space has been reached.”

Guy Taylor, head of West End agency, Cushman & Wakefield, said: “It’s been a tenants’ market for the last 12 months and landlords have been eager to offer frankly unprecedented rent free periods. Over the next few months this imbalance is going be redressed and we are likely to see more occupiers jostling to secure the best space available whilst it still offers relatively good value. In 2010, as more of the major requirements are satisfied, vacancy levels on prime space are going to fall and rent free periods are going to reduce correspondingly.”

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