In 1997 a paper entitled "The Cyclic Behavior (sic) of the Greater London Office Market" (Wheaton, Torto, Evans 1997) concluded that "the dynamic structure of property markets means that the response of these markets to economic change will be quite different than that which occurs in the markets for other goods and services". The co-authors of this study also observed that "a negative shock (economically) leads to a market rebound, and a positive shock eventually generates a market downturn". Most of the evidence for this paper was derived from the turbulent late '80's and early 90's which provided clear clues and evidence on market behaviour in a pronounced and extreme way.
Currently in 2010, over a decade later, we may be seeing further clues to support these observations as the central London office market steps up again to the podium as an apparent boom sector set amidst a backdrop of global economic downturn and domestic financial deficits.
Midtown is a clear example with current overall availability reduced to approx. 8%. This is now the lowest rate between the main markets of the West End at 10% and the City at 12.5%. These levels have been reached through unabated take-up of space measuring approx. 300,000 sq ft over the first quarter of 2010 and making almost 12 months of continued quarter on quarter growth in take-up of offices from early 2009. Of this, the grade A element was largely made up of new tenancies at One Southampton Row London WC1 where Carpmaels and Ransford and Metro Bank leased over 60,000 sq ft between them from the Englander Group at close to the asking terms of £49.50 per sq ft and St Martin's Courtyard in Covent Garden where professional recruitment consultants, Robert Walters, has acquired their new London headquarters in 11 Slingsby Place at an unreleased rental rate no doubt suitable for such a fashionable new environment off Long Acre and developers Shaftesbury Group and the Mercers.
New supply levels are worryingly low despite an estimated 400,000 sq ft of new space coming to the market over 2010 (which meets the long term average rate) and made up principally of Legal and General/Mitsubishi's landmark and vibrantly clad Central St Giles 500,000 sq ft mixed use scheme that includes almost 400,000 sq ft of offices. Once this is delivered later this year the Midtown market has only one further mainstream scheme up its sleeve at 1 Kingsway where approx. 105,000 sq ft is being delivered over the first quarter 2011.
These characteristics are mirrored in the West End and City markets where take-up is out performing supply and hence rental rates (or should I say, "apparent" rental rates) are increasing. Prime Midtown rents are currently considered to be £45-47.00 per sq ft and rising. Market forecasters are currently predicting growth to £49.00 per sq ft and higher by the end of 2010.
This is all very positive reporting and pleasing to read for landlords and agents alike. But is everything as it seems? Are these figures in anyway flawed or misrepresentative of the real situation? We are after all in a post election period of unease and indeed coalition, a state of affairs that has traditionally been synonymous with national crisis (what crisis?) and economic "concern" to say the least.
The London office market is one of the most keenly researched and reported on markets in the world. It is classically inelastic and endlessly surprising in its "cause and effect" trends. One aspect however has to be mentioned. And that is that of all the major reports written about the London office scene, very few (if any) draw any correlation between base rate interest rates and rental growth. It was, after all, high interest rates that was the principle "cause" of the early 90's office rental bust "effect".
In the current booming market we are operating in a market experiencing record low interest rates and I question as to whether this is an influencing factor in creating the current boost in letting activity. Furthermore, landlords seem anxious to maintain the momentum through offering high levels of rent free in order to induce tenants into their buildings. One large surveying practice released figures recently where they estimated that Midtown rent free incentives where running at 27 months rent free on a 10 year term certain tenancy at the end of Quarter 1 2010. This represents over a 20% discount on the annual rental rate and one heck of an incentive to take a lease. Of course, these levels are now falling due to the lack of supply, but as an example of crank starting a market into action after a very poor 2009, this is superb.
I am not bold enough to comment on a forecast for the next 12 months, albeit to say that I believe that the office market will be an interesting one to watch. The economy is in a state of flux and the re-emergence of inflation into the equation is a tad worrying.
Currently however it is steady as she goes in Midtown with a comfortable turnover and a busy marketplace and long may this last. A characteristic quite in tune with the Greater London office market response effect reported on in the 1997 research paper quoted above, particularly bearing in mind the current national financial situation.
"Vive la difference" - one might say.