LONDON OFFICE MARKET Q3 2007 MARKET SUMMARY
All below information is supplied by Co Star market research
After a strong first half, at the end of the third quarter the Northern Rock crisis hit the Financial Services sector and began to feel the full force of the US sub-prime lending problem.
Nevertheless, according to the Morgan McKinley London Employment Monitor, September saw no dramatic slowdown in middle and back office financial services recruitment levels within London despite the problems with lending. New job numbers rose by nearly 7% over the second quarter and September job numbers were up 12% compared to the same month the previous year. Optimists will see in this that the market is able to ride out this storm with little collateral damage. A more cautious appraisal would identify that the crisis only came to the boil at the end of the quarter and may not yet be seen in the data. Other data is less equivocal, manufacturing confidence turned down sharply in September for example.
As far as the Central London market is concerned, the effects of the credit reappraisal have been seen in the postponement of construction and withdrawal of schemes from the investment market particularly. Nomura House, for example, 300,000 sq. ft. in St Martin's-le-Grand was withdrawn from the market and construction on the Shard of Glass has been delayed again due to funding problems.
Take-up in the third quarter was around 5 million sq. ft. This puts 2007 on course to beat 2004 as one of the best performances in recent years.
The investment market has turned and capital values are falling. Following mounting evidence of a turning point in the last two reports, the third quarter has seen a switch in investor sentiment regarding London office markets. Reported yields in the West End and City markets moved out by 20 and 40 basis points respectively in the third quarter. Midtown saw yields rise by a half percent.
In the West End, rental growth slowed significantly from some 10% in quarter 2 to only 2%. Growth also slowed in Midtown moving from 8% quarter on quarter to 2%.
THE CITY EC1-EC4 Q3 2007
FOCUS recorded over 2 million sq. ft. of transactions in the EC postcodes for the first time this year. This puts 2007 substantially ahead of 2006 at the end of the third quarter.
Take-up in the third quarter was dominated by the legal profession. Law firm Reed Smith Richards Butler has ended its long search for a new headquarters by taking 155,000 sq. ft. at British Land's Broadgate Tower. The firm, which was formed in January following a merger between US firm Reed Smith and the UK's Richards Butler, has been operating from Beaufort House in the City and Minerva House near London Bridge. The building is due to be completed by next summer, with the firm looking to move in by the second quarter of 2009.
Elsewhere, US law firm Kirkpatrick & Lockhart Preston Gates Ellis LLP (K&L Gates), is to take 120,000 sq. ft. at Land Securities', One New Change scheme which will occupy a 2.5 acre site overlooking St Paul's Cathedral. K&L Gates will also retain an option on a further 16,000 sq. ft. until twelve months prior to completion. Currently, K&LGates occupies 75,000 sq. ft. in another Land Securities' scheme at 110 Cannon Street. It will move to New Change in 2011, a year after the scheme is completed.
At British Land's soon to be completed Ludgate West scheme another law firm, Charles Russell LLP, took 84,000 sq. City law firm Speechly Bircham will relocate to 77,000 sq. ft. at Land Securities' Building 6, New Street Square, in the summer of 2008 from their current space in St Andrew Street. Availability in the City stands at just less than 5 million sq. ft. at the end of the third quarter. This is the lowest outturn for five years.
The largest new space available is at UBS and Exemplar's, Milton Gate. This offers 200,000 sq. ft. of Grade A space to the north of the City core. Close to City Point, the area will be given further critical mass by the development of British Land's Ropemaker Place scheme currently under construction. This will provide around 575,000 sq. ft. when complete in 2010.
On the other side of the City, 84,000 sq. ft. of refurbished space available at Old Billingsgate Market on Lower Thames Street. Here too there is plenty of development with Watermark Place being created from the rubble of Mondial House by UBS, Oxford Properties and City Offices. This will have 480,000 sq. ft. in 2010.
The largest tranche of secondhand space is at Senator House on Queen Victoria Street with 90,000 sq. ft. available. There is 83,000 sq. ft. available at Beaufort House at the eastern edge of the City and 82,000 sq. ft. available at Serjeants Inn and a further 75,000 sq. ft. at 90 Bishopsgate. FOCUS identifies some 8.5 million sq. ft. under construction including Hermes 300,000 sq. ft. at 20 Gresham Street; Minerva's giant 445,000 sq. ft. Walbrook scheme opposite Cannon Street station; and British Land's 385,000 sq. ft. Broadgate Tower. Land Securities' New Change scheme is on site and demolition is proceeding slowly both at the "Cheesegrater" site in Leadenhall Street and the "Walkie Talkie" site in Fenchurch Street.
Prime rents stand at £67 per sq. ft. while average rents for new or refurbished space stand at £38 per sq. ft., £25 per sq. ft. for secondhand space.
THE WEST END W1-SW1 Q3 2007
The West End market sets the standard for Central London. Take-up in the W1 & SW1 postcodes totalled around 1 million sq. ft. in the third quarter, taking the figure for 2007 to 2.5 million sq. ft.
One deal stands out, at the end of September, hedge fund Permal Investments signed up for 18,500 sq. ft. at the old MEPC headquarters at 12 St James Square. The rent was £140 per sq. ft., the highest office rent in the world. Elsewhere, communications company, The Engine Group, pre-let the entire 60,000 sq. ft. at Great Portland Estates, 60 Great Portland Street. At Mandeville Place, luxury brand Dunhill took nearly 20,000 sq. ft. from Legal & General. In Petty France, MPC Commercial & Investments has taken 14,000 sq. ft.
Availability in the West End fell slightly to 2.7 million sq. ft. in the third quarter. This represents yet another low point in the current cycle that peaked at nearly 8 million sq. ft. at the end of 2004.
The largest space available at the end of the second quarter is 93,000 sq. ft. at Ashdown House in Victoria Street. 4 Victoria Street still has 62,000 sq. ft. available. At 14 Tothill Street 59,000 sq. ft. is available as well as 57,000 sq. ft. available at 33 Grosvenor Place. As far as secondhand space is concerned 106,000 sq. ft. is available at Drummond Gate. There is also 35,000 sq. ft. on the market in North Row and there is 33,000 sq. ft. available in George Street.
FOCUS shows just over 1.1 million sq. ft. under construction or refurbishment excluding schemes for own occupation for example the BBC's redevelopment of Broadcasting House. Schemes include Derwent London's Qube in Whitfield Street which is on the cusp of completion; D2 Privates' Fortress House in Savile Row, the former headquarters of English Heritage, providing 100,000 sq. ft. in 2009; Delanceys' scheme at 40 Portland Square.
The £140 Permal deal is likely to be the high water mark for West End rents in this cycle. Prime rents have risen fast in the West End but the rate of increase has started to slow. Prime rents stand at some £110 per sq. ft. Average rents for new or refurbished space stand at £46 per sq. ft. while secondhand space comes in at £42 per sq. ft.
MIDTOWN WC1 - WC2 Q3 2007
Take-up in the first half in the WC postcodes was just less than 300,000 sq. ft., down on the 360,000 sq. ft. seen in the second quarter and well below the long run average of 410,000 sq. ft. per quarter.
At 48 Leicester Square, Ticketmaster has taken 14,000 sq. ft. and publisher G E Fabbri 10,000 sq. ft.
Elsewhere Shell International took 20,000 sq. ft. at Shell Mex House on the Strand while at Chancery House on Chancery Lane, mortgage broker Charcol took 14,000 sq. ft. on assignment from Hudson Group.
FOCUS records just over 1 million sq. ft. of space available in the WC postcodes, a slight increase on the previous quarter. Persistent shortage of new or refurbished space continues to dog the Midtown market. The largest new space available is 52,000 sq. ft. in Red Lion Square. 39,000 sq. ft. remains on the market at Midtown in High Holborn and 32,000 sq. ft. at Centrepoint.
The largest secondhand space is available at 222 Grays Inn Road where there is 95,000 sq. ft. At Chichester House in High Holborn a further 57,000 sq. ft. is available and 27,000 sq. ft. is on the market at Law Society House. The development pipeline shows some 1.4 million sq. ft. under construction or refurbishment in Midtown. Land Securities' New Street Square developments in Fetter Lane dominate, but the figure includes 125,000 sq. ft. under refurbishment at Centrium on Kingsway and 400,000 sq. ft. at St Giles Court. Prime rents in Midtown continue to creep upwards to between £55 and £60 per sq. ft. up from £40 at the end of 2005. Average rents for new or refurbished space stand at £34.30 per sq. ft. with secondhand space available on average at £27 per sq. ft.
DOCKLANDS & SOUTHBANK Q3 2007
Take-up in the third quarter of 2007 has seen just over 400,000 sq. ft. transacted in E14, this is a similar level as seen in quarter two. Most of this is accounted for in one big transaction. Fimalac, the owner of Fitch Ratings, have purchased 30 North Colonnade from Canary Wharf. The new building will comprise around 320,000 sq. ft. in the centre of Canary Wharf. Fitch Ratings will decant their 700 staff into 30 North Colonnade when the building is completed at the end of 2010, initially occupying 132,000 sq. ft. with the remainder of the building available for subletting.
Development continues on KPMG's new headquarters at 15 Canada as is Bear Stearns 5 Churchill Place. Construction is due to be completed by mid 2009 on both schemes. Availability in Docklands remained fairly static in the third quarter standing at just over 900,000 sq. ft. There is very little new or refurbished space available with the largest 27,000 sq. ft. available at 1 Canada Square The largest secondhand space available are two tranches of 137,000 sq. ft. and 111,000 sq. ft. in Canada Square.
Prime rents in the Docklands remain at around £50 per sq. ft. on the Canary Wharf Estate.
South bank SE1 & SE11
One huge pre-let dominated the South Bank market in the third quarter as the Royal Bank of Scotland took Bankside 2 and Bankside 3 from Land Securities. This represents some 378,000 sq. ft. and together with a slew of sub-lettings at IPC's Blue Fin building (including Bankside 1 ) very nearly 450,000 sq. ft. was taken up at the one development. Overall just over 500,000 sq. ft. was taken up in the market.
New space remains in short supply on the South Bank with the largest space on offer some way away from the river. 52,000 sq. ft. at the Elephant and Castle shopping centre and 43,000 sq. ft. in Long Lane. The largest space available close to the market core is 24,500 sq. ft. on the market at the Cottons Centre in Hays Lane. Secondhand space is better provided for with the 243,000 sq. ft. office content at County Hall and 67,000 sq. ft. available at Sea Containers.
This is a market that needs development to provide critical mass. With the Bankside scheme pre-let, the pipeline is starting to look a bit thin, particularly with further delays to the "Shard of Glass". The 165,000 sq. ft. refurbishment of Kings Reach tower is the largest scheme.
Prime rents on South Bank stand at around £45 per sq. ft