CoStar Central London Office Market Report 2009
Data and Analysis from CoStar UK
CENTRAL LONDON OFFICES: OVERVIEW
2009 proved to be one of the most challenging years for the real estate industry in modern history with the economy in recession for the majority of the year. Leasing activity slowed, rents dropped, occupiers gained the upper hand and developers postponed projects. Not surprisingly, the UK's largest office market, London took the brunt. Companies throughout the capital re?structured and reassessed their businesses in order to survive the downturn.
The Only Way is Up in 2010
As expected, take up in 2009 declined compared to that of previous years. Totalling 11.4 million sq ft, the past 12 months activity was 14% down on what was achieved in 2008. CoStar data shows that quarterly leasing levels have risen steadily from the anaemic 1.7 million sq ft transacted in Q1 2009 to the year's peak of 3.9 million sq ft in Q4 2009.
The best achieving markets in Central London were the Midtown and City markets, registering only single digit falls in take up of 3% and 7% respectively on last year's levels. In terms of quarterly growth, this was best gained in the Docklands and E1 market, in contrast to the South Bank where average quarterly growth was 10%.
London boasted the largest deal in the UK. Nomura Bank took 547,000 sq ft at the Oxford Properties Group and UBS Global Asset Management development, Watermark Place, on a 20 year lease with a six year rent free period. This sizeable deal provided a much needed boost to occupier confidence.
Market Inundated with Space in 2009
The downturn in demand resulted in the total level of available space rising during 2009. This peaked in Q3 at 36.4 million sq ft, dropping to 35.6 million sq ft by the end of the year. This represents a 12% rise on where the market was at the end of 2008.
New and refurbished properties accounted for 40% of all available space at the end of 2009. Second hand space comprised a further 33% of the total. It is this property type that has seen the most significant increases, as tenants look to downsize and reduce costs during the recession. The City alone experienced a 56% annual increase in the amount of second?hand space being marketed.
Average asking rents across City, West End and Midtown had fallen by 19% by the end of the year compared with the end of 2008. This is expected to stabilise going into 2010 as occupiers begin to return to the market.
CITY OFFICE MARKET
The City office market recovered over the course of 2009 to achieve a not insignificant 4.3 million sq ft of take up. Having seen a dramatic tail off of deals in the last quarter of 2008 and into Q1 2009, Q2 letting activity picked up quickly. Take up in these 12 weeks equalled that of the previous 6 months. The peak of the year came in Q3, with 1.4 million sq ft of space taken, aided in part by Nomura Bank taking 547,000 sq ft at the new Watermark Place building. This significant deal in the City signalled a renewed confidence and was followed by further deals over 100,000 sq ft most notably at number 20 & 60 Gracechurch Street.
Available space peaked in Q2 at 14.1 million sq ft, levels not seen since 2004. As the rate of recovery picked up, total space fell to 13.8 million and has remained at this level for the last half of the year. 48% of space available is new/refurbished space with 26% of space being marketed under construction.
MIDTOWN OFFICE MARKET
CoStar data shows that the Midtown office market avoided much of the slump witnessed in the neighbouring City market. Deal activity remained consistent throughout the year averaging 300,000 sq ft per quarter, rising to 519,353 sq ft in Q4 2009. This brought the annual total 1.5 million sq ft, only 100,000 sq ft less than in 2008.
2009 also saw Midtown achieve its largest transaction for 2 years, with 71,065 sq ft taken at 272 High Holborn by The University of the Arts. Q4 saw two lettings at 40 Holborn Viaduct totalling 84,977 sq ft, to Cap Gemini and GDF Suez Energy UK. These deals show the diversity of tenants within the Midtown market, a characteristic which has helped it to weather the downturn.
Available space peaked mid year at 4.5 million sq ft but since then has fallen to 4.3 million sq ft.
WEST END OFFICE MARKET
The West End office market bottomed out early on in the year. Subsequent quarters grew throughout the year, resulting in an annual total of 2.5 million sq ft of space taken, 17% down on 2008. The largest office transaction for the year took place at the Wells & More Building on Mortimer Street. Retailers New Look took 60,889 sq ft of space relocating from their flagship store on Oxford Street.
2009 saw the market reach its highest level of available space on the market since 2005. Available space rose to a peak of 6.7 million sq ft. As take up increased, this level began to fall, reaching 6.4 million sq ft by the end of the year. The West End's supply pipeline is less significant than the rest of Central London, with only 450,000 sq ft of space available that is currently either under construction or refurbishment. This will lead to a continued squeeze on good quality space in the West End.
DOCKLANDS & E1 OFFICE MARKET
The Docklands and E1 market has had a bumpy two years with take up levels plummeting to a low of just 96,000 sq ft in only 29 deals in Q1 2009. This was a new low for the area. The previous 5 years saw quarterly take up levels average 400,000 sq ft. However, the second half of the year recovered strongly, returning to trend levels of take up. Ending the year on a high, take up totalled 1.1 million sq ft for 2009, only 8% down on 2008. The largest deal in the E1 postcode was News International taking 192,000 sq ft at 3 Thomas More Square, the largest transaction in the Docklands was achieved at 25 Canada Square with 75,611 sq ft being taken.
Available space remained relatively constant throughout 2009, peaking in Q2 at 3.9 million sq ft. 39% of this space is second hand with a further 26% still under construction.
CENTRAL LONDON FRINGE OFFICE MARKETS
The Fringe markets of Central London experienced a mixed bag of fortunes during 2009. The western fringe recorded a sharp decline in take up at the end of 2008, only to have a bumper Q4 2009. A total of 1.1 million sq ft of space was taken in 2009, 68% of which was transacted in the W postcode area.
The average quarterly take up in the northern fringe office market rose from 84,000 sq ft in 2008 to 209,000 sq ft in 2009.
The largest letting in this market was 20,280 sq ft at Woolworth House on Marylebone Road, NW1 by Hong Kong corporate, Lee & Fung.
The South Bank experienced a sharp spike in available space on the market in 2009. Coupled with subdued transactional activity, this makes for a lacklustre market. Take up for the last 12 months totalled 481,955 sq ft, a far cry from the 2.1 million sq ft seen in 2007.
CENTRAL LONDON DEVELOPMENT PIPELINE
Office developments in Central London became the first casualties of the recession with many projects put on hold. As a consequence current construction levels are fairly low. There are scheduled deliveries of only 3 million sq ft in 2010 across the market as a whole.
Nonetheless there are early signs that developers are looking to resume construction. Construction at one key site put on hold will now recommence in May 2010, Land Securities, Park House on Park Street in the West End. This market is severely undersupplied with grade A space.
The pipeline currently has 15.9 million sq ft of space awaiting developers to go on site, 27% of which have no proposed start dates. Of the current 6.4 million sq ft that is under construction, 13% has already been pre let. A sure sign that the demand for new or high quality space is returning to Central London.