LONDON OFFICE MARKET Q2 2007 MARKET SUMMARY
All below information is supplied by Co Star market research
The financial services sector enjoyed a strong first half of 2007, with business volumes increasing at their fastest rate in over seven years, but demand and profitability are set to weaken next quarter according to the well respected CBI / PricewaterhouseCoopers Financial Services Survey.
Volume growth was strong across all financial sub-sectors, with buoyant demand from financial institutions. This is expected to be sustained in the second half but demand from private individuals and overseas customers is expected to slow.
Business sentiment also strengthened, with a balance of +12 per cent of firms more optimistic about the overall business situation in the financial services sector than three months ago. Job creation remained strong, with a balance of +35 per cent reporting an increase in staff, but this is expected to moderate slightly in the third quarter.
Employment growth and investment remain strong in the banking, insurance and fund management sub sectors all of whom expect demand to remain strong for the full year. This remains good news for the Central London office market. The volume of space in the development pipeline rose sharply again in the second quarter with around 4 million sq. ft. starting construction. Judging from the number of sites being cleared, this trend will continue for the whole of 2007 as developers respond to higher rental values.
Overall, the fall in vacancy rates that has seen availability halve since the beginning of 2005 appeared to moderate a little in the second quarter. Nevertheless, pressure on rents remains strong, particularly in the West End where supply of Grade A space is very limited. Take-up in the second quarter was approaching 5 million sq. ft. This puts the first half of 2007 on a par with the same period in 2004 and substantially better than the intervening years. Rising rents continue to attract investment interest in core markets. Average yields have moved from around 8% at the end of 2003 to 5% currently. However, Figure 1 shows clear evidence that yields have been bottoming out for the last six months. In fact the trend has been flat from the middle of 2006 onwards. Bearing in mind that these are average yields covering the whole of Central London, this is an analysis of around 60 million sq. ft. of investment deals on FOCUS representing some £40 billion of investment.
Conventional wisdom is that there is sufficient liquidity in the London office market to keep transaction volume high for the remainder of 2007 at least. Nevertheless, there is clear evidence here of a slowing investment market at the half year point.
THE CITY EC1-EC4 Q2 2007
Following the 222,808 sq. ft. pre-letting to Mayer, Brown Rowe and Maw LLP, 201 Bishopsgate again secures one of the largest City deals with Henderson taking 124,036 sq. ft. of office space from British Land on a lease expiring in November 2027.
201 Bishopsgate is under construction for completion in early 2008.
On the City fringe at Derwent London's Angel Centre on St Johns Road, Telereal took 162,325 sq. ft. on a 15 year lease.
In another big pre-let the Bank Of Ireland has taken 67,300 sq. ft. of office space from Mitsubishi Estate Company and Mitsubishi Corporation on a 15-year lease at Bow Bells House on Cheapside.
At Beaufort House in St Botolph Street, Tradition Financial Services has taken 50,586 sq. ft. of basement and first-floor office space from Credit Suisse.
Aldgate House on the eastern fringe of the City where 87,025 sq. ft. is available. Closer to the core there is 85,789 sq. ft. at City Place House on Basinghall Street and 83,692 sq. ft. at Old Billingsgate market on Lower Thames Street.
The largest tranche of secondhand space is on Farringdon Road where there is 152,636 sq. ft. available at Fleetway House. And 93,583 sq. ft. available on Gresham Street in the City core while 115,200 sq. ft. is available at Beaufort House at the eastern edge of the City. Also, 90,270 sq. ft. at Senator House on Queen Victoria Street.
FOCUS identifies some 7.3 million sq. ft. under construction including British Lands' Ropemaker Place on Chiswell Street which will deliver over 500,000 sq. ft. and Hermes' 20 Gresham Street which will bring over 243,835 sq. ft. to market. Preparatory work has started at Land Securities' New Change scheme opposite St Pauls Churchyard and at the "Cheesegrater" site in Leadenhall street.
Upward pressure on rents has been considerable throughout 2007. Prime rents stand at £60 per sq. ft. while average rents for new or refurbished space stand at £34.20 per sq. ft., £25.00 for secondhand space.
THE WEST END W1-SW1 Q2 2007
The headline grabbing deal of the quarter saw hedge fund BlueBay Asset Management taking 36,047 sq. ft. from Grosvenor Estate and Morley at 76-78 Grosvenor Street. The property was taken on a 15-year lease at a rent of £117 per sq. ft. for the majority of the space.
While this is not the first deal over £100 per sq. ft. in the West End it is the biggest so far and sets the seal on rental increases for the whole market.
On the other side of Oxford Street, PR and marketing consultancy firm, Freud Communications Ltd, has taken 31,293 sq. ft. also on assignment in Newman Street.
The largest space available at the end of the second quarter is the 81,000 sq. ft. on offer at 11 St James's Square. This shows the progress made in SW1 over the last year. In Great Portland Street at Generation House, then follows a clutch of medium sized offices including: 55,340 sq. ft. in Baker Street 53,889 sq. ft. at National House and 50,979 sq. ft. in North Audley Street.
As far as secondhand space is concerned 66,000 sq. ft. is available at Berkeley Square House in the West End core although the majority of this is now under offer. In Gresse Street Fitzrovia, 47,000 sq. ft. is available and 45,251 sq. ft. is on offer at 33 Wigmore Street.
The development pipeline in the West End shows over 3 million sq. ft. under construction or refurbishment, albeit that much of this is either pre-let or for own occupation, for example, the BBC's redevelopment of Broadcasting House. Schemes include Great Portland Estates 108,000 sq. ft. Titchmor development on Mortimer Street; Delanceys' scheme at 40 Portland Square; and London Merchant Securities', now Derwent London, Qube off Tottenham Court Road.
Prime rents have risen fast in the West End as is evidenced by the Bluebay deal particularly and now stand at £100 per sq. ft. Average rents for new or refurbished space stand at £46.30 per sq. ft. while secondhand space comes in at £40.70 per sq. ft.
MIDTOWN WC1 – WC2 Q2 2007
At Targetfollow's 48 Bernard Street the Association Of Train Operating Companies has taken 22,930 sq. ft. on a lease expiring in December 2018.
Elsewhere at Tishman Speyers Centrium development, Tishman Speyer European Strategic Office Fund took nearly 19,369 sq. ft. of space At Staple Court, lawyers Marriott Harrison took 16,685 sq. ft. of office space from City & General on a 15-year lease paying £37.50 per sq. ft.
FOCUS records 900,000 sq. ft. of space available in the WC postcodes, 10% down on the previous quarter.
A shortage of new or refurbished space persists in Midtown. The largest space available, albeit under offer, is 52,623 sq. ft. in Red Lion Square.
35,880 sq. ft. remains on the market at Grand Buildings, 1 Strand and 31,351 sq. ft. at 65 Kingsway.
The situation is not much better for secondhand space. The largest of this is available at Chichester House 56,522 sq. ft. and at 222 Grays Inn Road 95,545 sq. ft. On Chancery Lane 27,495 sq. ft.immediately available at Law Society House. The development pipeline shows some 1.2 million sq. ft. under construction or refurbishment in Midtown. The New Street Square developments in Fetter Lane dominate but the figure includes 174,206 sq. ft. at Castlemore's 40 Holborn Viaduct and Ebble Developments 70 Chancery Lane with 56,872 sq. ft.
Prime rents in Midtown continue to creep upwards at just under £50 per sq. ft. up from £40 at the end of 2005. Average rents for new or refurbished space stand at £34 per sq. ft. with secondhand space available on average at £27.20 per sq. ft.
DOCKLANDS & SOUTHBANK Q2 2007
The story is one of development. The twin cores are approaching completion on 30 North Colonnade and KPMG's new headquarters at 15 Canada Square. KPMG purchased the long-leasehold interest in 400,000 sq. ft. of space from Canary Wharf Group plc on a 999-year lease at the end of 2006. Construction is due to be completed by April 2009. Bear Stearns have signed up for 206,290 sq. ft. at the new 5 Churchill Place, due for completion mid 2009 and State Street Bank will take occupation of 20 Churchill Place in August 2008.
In a sign of how far the market has come, the largest new space available is at Wyndham House on Marsh wall where 61,380 sq. ft. is available The largest secondhand space available is 137,180 sq. ft. at 1 Canada Square.
Prime rents in Docklands stand at around £50 per sq. ft. on the Canary Wharf estate.
South bank SE1 & SE11
New space is in short supply on South Bank with the largest on offer 66,000 sq. ft. at More London.
The Blue Fin building on Southwark Street has 61,846 sq. ft. is availablel. In total there is around 1.2 million sq. ft. available of which 380,000 is new or refurbished.
Development is crucial to the growth of critical mass in this market. Land Securities' 430,000 sq. ft. Bankside towers, 185,604 sq. ft. under construction at the UBS scheme in Tooley Street and the 165,000 sq. ft. refurbishment of Kings Reach tower are the largest schemes.
Take-up in the second quarter of 2007 was 808,000 sq. ft. boosted by two large pre-lets. The first at 7 More London to PriceWaterhouseCoopers of 417,000 sq. ft; the second at 160 Tooley Street where London Borough of Southwark has pre-let 185,604 sq. ft. Two other deals at more London saw Regus taking 30,621 sq. ft. and Climate Change Capital taking 18,000 sq. ft. Prime rents on South Bank stand at around £45.