In Q1 2010 the worst seemed to be behind us – generally, economic comment was cautiously optimistic for 2010 and there were a considerable number of column inches devoted to the Central London office market – much of it provoked by some large lettings in the City which created banner headlines of how the Central London offices market was recovering – and the West End offices market basked in that reflected glory.
Agents reported greater viewing levels – the first pointer to a recovery is often the buzz in the market. Tenants, having read articles in various non-Property magazines and newspapers about how the market was recovering, realized that the falling rents scenario experienced over the last couple of years had come to an end, and therefore were happier to commit to acquiring offices. For this reason, the take up in the West End by June was approaching 2 million square feet, which sat quite well as being approximately half of the annual average of between 3.5 – 4 million square feet annually experienced over the last 10 years. All seemed to be back on course.
However, a very quiet summer holiday period and a not very busy September has lead me to question whether the figures for the end of the year will continue? I do not think they will, principally because many of the deals that were there to happen over the last 12 months have taken place. Many Landlords are taking a perceived shortage as being an indicator that rents will rise quite sharply over the next 12 months. Let us look at the facts though, prime Mayfair developments such as 23 Savile Row and Stratton House are finding very slow take-up, and new buildings coming through such as the re-branded Devonshire House are talking about quite high levels of rental – a level at which I believe there is a reluctance from some tenants to transact where rentals are in the £80's / £90 per sq ft.
We are seeing very good space being offered in period buildings in Mayfair at, for instance, an asking rental of around £60 per sq ft – and I think that these buildings may have a resurgence in popularity, particularly where the Landlords have created a top and very contemporary specification building: full air conditioning, a sophisticated data network and larger open plan areas mean that these buildings can have a strong appeal - they are the essence of what has always been thought of as Mayfair and St James's.
In Soho and Noho we see that there is a shortage of the right kind of product – the right kind of product being not necessarily an overly sophisticated building, but properties with character and style that have good cable management and comfort cooling and offered in the £30 / £40's rental range. I have several clients looking for this sort of space and there are just so few choices at the moment. Landlords should take note of this strong demand for not overly sophisticated and trendy space, at sensible rentals.
Crossrail's construction is having quite an impact on north east Soho and will make this area and Noho even more attractive locations for occupiers and investors in the medium term, although at the moment – particularly when combined with the road works that seem to be everywhere – the construction works are far from helpful in a difficult letting market.
There is talk of potentially double digit rental inflation in the West End offices market over 2010. It is easier to see that this might happen in very prime locations where top rents will have moved from, say, £75 to £85 per sq ft as a headline rental, I do not see this inflation taking place in the surrounding areas within the West End. Firstly, there is not the appetite for driving rentals up, but I also do not see at the moment there is the sort of demand that will move rentals forward by the end of 2010.
Rent free periods have been projected to decrease in the course of the year, but in most transactions they remain around 2 months for every year certain for transactions over 5,000 sq ft – i.e. c.10 months for a 5 year lease and c.20-22 months for a 10 year lease. In smaller transactions of 1-2,000 sq ft the rent free periods are less – sometimes as small as 1 month per year certain.
In spite of the difficulties with obtaining funding from conventional bank sources, the owner / occupier market is strong at the smaller, sub-5,000 sq ft level. A freehold in Soho was recently put on the market and resulted in 100 viewings and over 10 offers being made when it went to best bids. Most of the buyers would be referred to as "cash" purchasers – there are a surprising number of people around with a couple of million pounds in their back pockets!
We are keeping a very close eye on lease lengths – the market up to and slightly over 5,000 sq ft has anticipated a 10 year lease with a 5 year break as a norm for the last 3-4 years, but I am anticipating that Landlords in better buildings will resist this mid-term break over the next 12-18 months – not necessarily by saying an outright "no", but more by making the terms for a midterm break much less attractive. Breaks are so infrequently undertaken by tenants that they might consider again the financially less attractive packages that having a break entail.
Demand will continue to be relatively thin over the next 6-12 months, but there is a lack of good stock coming through. Many tenants will be disappointed by lack of choice, but now is the time to strike a deal because I do not think that it will be possible to strike such advantageous terms in 6 months time.