03/12/2007
by Robert Leigh, director, Devono
As commercial property rents in London reach £140 per sq ft, the capital is experiencing an office rental price rise of record proportions. With London overtaking New York as the financial capital of the world, it has became the darling for hedge funds, private equity and investment managers, however it's not just the financial sector vying for office space in the capital.
A major challenge to the central London office market is the significant shortage of space compared to other UK city centres. This is the reason why rental prices have been driven up to record heights and why they're unlikely to come down. Areas such as St James's and Mayfair are leading this trend commanding some of highest £ per sq ft property rentals in the world. Another driving force adding to this situation is the high demand for grade A office space of which is particularly limited in supply.
Unlike many other UK cities, businesses occupying office space in central London tend to lean towards renting rather than buying due to the inflated prices, with returns tending to be more rewarding invested into their businesses rather than property.
As a result of this 'landlord's market' tenants will need to be mindful when agreeing leases with landlords, but before businesses commit to a location, it's important to have an understanding of how London has changed in the past few years and what impact it will have on trends in the future.
In the past, everyone used to know who worked where. It was simple. The newspaper journalists were in Fleet Street; money men in the City; lawyers were near the Courts, civil servants in Whitehall and Victoria.
The business map of London was settled for decades - until recently. In the last twenty years however, there have been major changes as established industries have moved and others have taken their place.
Now there is a new business map of London.
Why have the changes taken place?
The creation of new areas and schemes such as Canary Wharf and Paddington Central/Basin has been among the most influential factors. These opportunities inspired many organisations to review their locations, and many have moved from the City or West End.
Soon, for instance, virtually all the national newspapers had moved out of Fleet Street. Many of the fashion houses left the area north of Oxford Street (includes Margaret Street, Great Portland Street and Great Titchfield Street). Changes like these created space and, where industries moved out, others moved in. Often the incoming tenants have been from new business sectors like new media, IT and hedge funds which have formed their own "villages" in areas that suited them.
So who works where now?
West End (incl Soho & Covent Garden): Media Darlings.
Old : Soho and the West End used to be known for film companies and advertising agencies. Later there were also IT companies. Many have stayed but others have moved further away to fringe locations of such as Clerkenwell and Farringdon for larger premises and lower rents.
New: the West End has seen an explosion of media, new media and PR companies. Demand has led to these industries to overflow north of Oxford Street, from Soho up into neighbouring Noho which has now become a sought after area in its own right.
Mayfair and St James: New money in old style offices
Old: Property companies dominated this traditional area. Many of them have moved north to Marylebone.
New: This area, still the most prestigious in the capital, is currently commanding the highest office rents in London. Hedge funds and financial services companies have taken up the elegant offices.
London Bridge: no longer on the fringe
Old: This was previously a fringe location with a variety of businesses in smaller offices.
New: It is an important extension of the City south of the river with leading legal practitioners, consultants and accountancy firms such as PwC and Ernst & Young having their headquarters here.
Clerkenwell & Farringdon - Price hike
Old: Office rent was reasonably priced in this area, typically occupied by small media industry companies and their suppliers such as photography studios
New: It is a major area for new media and PR agencies as well as production and new fashion with many young companies. It is widely perceived to be the new alternative to Soho and Covent Garden. This popularity has led to this becoming one of the fastest growing areas in recent years.
Victoria: Internet experts in, government out
Old: Government offices and some corporate headquarters.
New: Many civil service departments have moved further out to reduce rents. Several major finance and new media companies including Google and Microsoft have moved in. It is now the second most expensive area in London after Mayfair and St James,
The City: West End watch out (EC2, EC3 and EC4):
Old: Banks, legal, financial, insurance and newspapers (EC4)
New: While most of these industries still continue in these areas, many companies have moved out. However there is a migration of IT companies into the area from the West End, attracted by the City's lower rents and easier planning consent.
Holborn/Strand: Headhunters and Justice
Old: Many lawyers have always been here within walking distance of The Law Courts and Inns of Court - and one another; it has also been popular with accountants
New: recruitment and headhunting agencies have joined the lawyers and accountants here since the area's regeneration five years ago.
The rate of change is much faster as leases are shorter than they used to be as companies review their property costs more frequently. Today's businesses are inclined to move more often than the previous generation of companies.
Within these changes and current trends are clues to the future - and signs that the market will gradually become more favourable to tenants than it has been recently.
There is currently 5million sq ft of office space under construction due for completion in 2010, mostly in the City where planning is less restrictive. There will soon be another merry-go-round of changes as businesses move into this new space and vacate property elsewhere for others.
Areas to watch out for include Clerkenwell, Farringdon and Shoreditch in addition to Tower Hill and Aldgate East (currently undergoing regeneration by the Corporation of London), which are fast becoming new office destinations for many businesses and organisations moving in central London.
Looking ahead
While prices won't necessarily abate quickly, it is thought that this development will add a flood of new offices to help tackle the demand and possibly lead to more competitive rents as supply catches up with demand, if not overtaking it, leaving landlords keen to maximise their occupancy rates.
Flexibility is the key word
In such a challenging market, expensive mistakes can very easily be made. Organisations and businesses looking to rent office space in central London should seek professional expert advice rather negotiate for themselves. For instance, the contract should include tenant-only break options, as landlords will be looking to impose 10-15 year straight lease terms, so they benefit from today's high rent for the full duration of the lease even of the market value drops.
Finding a suitable offices and negotiating lease contracts is a time-consuming and exhausting process at the best of times - but especially in central London at present.
About the author:
Robert Leigh is the director of Devono, central London's only commercial property company which exclusively acquires office space for tenants looking to move in central London. In 2006 Devono acquired more office space for tenants moving into the capital than any other commercial property company in London. www.devono.com Tel: (020) 7096 9911