27/02/2008
London - Seen from above, London's center resembles a big construction site,
a testament to the commercial-property boom that has accompanied the British
capital's rise as a global financial center.
But as banks put a lid on expansion plans amid a deepening credit crisis, some
landlords and developers are worried the ubiquitous construction cranes will
give way to vacant office space.
More than eight million square feet of office space is being built in the
financial district, known as the City, and a good chunk of it will become
available this year and next, according to Knight Frank, a property consultancy.
That level of construction is about 60% higher than the City's 10-year average.
About 80% of the space under construction is considered "speculative," meaning
the developers don't yet have tenants lined up, according to Knight Frank.
Normally, about half of the space under construction in the City is speculative.
At the same time, new lease signings in the City fell by 49% in the fourth
quarter from the previous quarter, as banks put a lid on expansion plans.
Australian investment bank Macquarie Group Ltd., for instance, postponed plans
to lease about 300,000 square feet of office space for a new London
headquarters.
Some banks also are cutting back on their existing office space. Earlier this
month, Citigroup Inc. quietly put on the market five floors of its 42-floor
office tower in Canary Wharf. The company leases the space and is trying to
sublet the empty floors, says spokesman Rob McIvor. He said the bank was able to
open up the space after tightening staff seating plans. He said the empty floors
aren't related to layoffs of fewer than 100 London staffers in recent months.
Developers started the building boom several years ago as banks, law firms and
other companies expanded quickly. In many cases, property firms knocked down
buildings from the 1930s, 1950s and 1980s to make way for towering structures of
glass and steel. The City's mix of centuries-old architecture and cheap
post-World War II construction didn't appeal to big banks, in particular, which
wanted large, open trading floors and modern facades.
But as the new buildings rise next to London's most historic sites, from St.
Paul's Cathedral to the medieval Guildhall, some critics are balking. In a
speech last month, Prince Charles, an outspoken architecture critic, called many
of the new buildings "carbuncles" that will leave London with a "pockmarked"
skyline. "For some unaccountable reason we seem to be determined to vandalize
these few remaining sites which retain the kind of human scale and timeless
character that so attract people to them and which increase in value as time
goes by," he said.
Save Britain's Heritage, a nonprofit group, has tried to fight some of the new
construction. The group's secretary, Adam Wilkinson, says London's charm is in
its winding streets, pubs and historic churches. "To have that intruded on by a
tall building distorts that. It destroys that impression of being in a small
village, which is one of the things that makes London bearable as a place to
live," he says.
The British are fond of giving their buildings nicknames: a pickle-shaped
skyscraper by renowned architect Norman Foster completed in 2004 was quickly
dubbed the Gherkin, while a 47-floor tower under construction is now called the
Cheese Grater because its right-triangle shape looks ready for a giant hunk of
cheddar. Developer Land Securities is in the midst of demolishing a building to
make way for a 39-floor tower dubbed the Walkie Talkie because it vaguely
resembles one. Other proposed buildings are called the Shard of Glass, the
Helter Skelter, and the Boomerang.
Commercial real estate is, of course, prone to boom-and-bust cycles. From the
time developers sense demand rising it can take years to complete new buildings,
by which time demand often wanes. Concern that rental income would stop growing
as quickly has contributed to a fall in U.K. commercial-property prices over the
past year. The drying up of easy loans that helped investors buy buildings has
compounded the drop.
Knight Frank forecasts that office vacancy levels in the City will rise to 10%
by the end of the year, from 7.9% at the end of 2007. The City's 10-year average
vacancy rate is 8.9%. By comparison, office vacancy rates in Manhattan are about
4% to 5% currently and are expected to stay level this year, says Peter
Riguardi, president of Jones Lang LaSalle in New York. In Manhattan's prime
financial neighborhoods, midtown and downtown, about 15 million square feet of
office space is under construction, including 10 million square feet at the
World Trade Center site, he added.
British Land, one of Britain's largest property firms and the developer of the
"Cheese Grater," also is building a pair of towers next to Liverpool Street
train station, due to be completed this year, that will put 822,000 square feet
of new office space on the market. The towers, designed by well-known
architectural firm Skidmore Owings & Merrill, are "the biggest speculative
office development ever undertaken in the City of London," British Land's Web
site says.
A British Land spokeswoman says the smaller of the two towers is now 75%
rented, while the larger, 35-story tower is 36% rented. She said the company
expects lease signings to be slow in the next few months but doesn't see that as
a cause for concern.
With supply growing and demand falling, tenants are gaining power. Robert
Leigh, a realtor with the real-estate agency Devono, says he believes City rents
will fall "significantly" in the next six to nine months, and that landlords
will be offering more perks to win tenants. Mr. Leigh said he and his clients
have already started pushing landlords for longer rent-free periods, smaller
deposits and shorter leases. He said it was too early to say whether they will
be successful in achieving their demands.