West End Commentary
by Tony Parrack
Edward Charles & Partners
Well, there should have been a phenomenal change in the West End Offices market place over the last 4-6 months: the uncertainties of the summer due to the credit squeeze, the Stock Market fluctuations and the Northern Rock debacle have been non-stop front page news now for six months. We have seen Governments cut interest rates in order to avoid Recession, talk that the US is going into Recession, and Politicians and Economists trying to separate the large Stock Market losses from the global Economy.
So what has happened in the West End offices market - surely this turmoil has had an effect? The first indicator to look at is asking rentals - but these remain historically high, and we are not yet seeing any reductions as a result of this seeming Economic uncertainty. Asking rentals are generally still at all-time highs - in excess of £100 in Mayfair and St James's and regularly in the £60's in Soho and Noho - even as high as mid-£80's in Golden Square, where the floor is shortly to go under offer!
Landlords are still experiencing good levels of viewings, and they know that supply is limited: availability has just been reported in the Estates Gazette as being at 6.07% at the end of 2006, but by the end of 2007 this was down to 4.18%; construction starts in 2007 totalled only 1 m sq ft as apposed to almost 2 m sq ft in 2006; future completions in 2008 are projected to be 2.71 m sq ft but only 0.8 million in 2009 and 0.54 in 2010. And of that 2.71 m sq ft to become available in 2008, only 1.47 million sq ft is actually available - the reminder being pre-let.
It therefore looks like we are still in the market place that will be buoyed up by a shortage of supply for the next 12 months at least.
Demand - what is happening to demand? Where we have lost some smaller transactions in the sub 2,000 sq ft market, we have found a replacement tenant immediately - and in one case in a W1 mews building the tenant was lined up even before the deal was lost during one of the busiest Decembers that we have had on record. Yes, we have lost the occasional deal but even in the strongest market we lose deals for various reasons and we are not noticing that tenants are changing horses to go for another property - in fact I think most tenants know that options are still very limited should they back out of a deal.
Nevertheless, demand is likely to get more selective - by which I mean tenants are becoming more concerned about specification, particularly with regard to Green issues where Corporate Social Responsibility is becoming an ever greater issue around Boardroom tables. Tenants are also being increasingly concerned about the higher service charges that will be anticipated in poorly specified buildings. With some items such as photovoltaic cells having a commercial payback in excess of 25 years and possibly in excess of 50 years (allied to questions on their ability to be recycled) the more intelligent occupier is looking for simpler 'Green' investment in items such as rainwater harvesting (so-called grey water, to be re-used in WC's) and Ground Source Heat Pumps. The market is becoming more educated - questioning the investment of £50,000 in something that only provides enough electricity to boil a couple of kettles, just to tick an ecological box - there may be more appropriate ways to invest that money for Carbon savings.
There is little evidence that rent free periods are increasing - at the beginning of 2007 they were slightly less than 1 month for each year certain in a lease period and they are still around that level, except for a larger deal. We are aware of situations where a deal may seem to be dragging through once in Solicitors' hands and a landlord may offer an additional slight longer rent free period in order to close the deal more quickly.
With very little product available in the £35-40 per sq ft range, there will probably continue to be a greater move to fringe locations such as Camden. In the last couple of years we have been involved in lettings to large fashion companies moving out of the West End such as Hugo Boss and French Connection, and we are involved in a 20,000 sq ft pre-letting to a TV company moving out of Soho. It is not just the lower rentals in these fringe locations, the buildings themselves are frequently more appropriately specified and finished for the needs of this type of tenant.
The Investment market has had a massive cooling off during the course of 2007, after record times for the previous 2-3 years. The owner-occupier market is still likely to remain strong however, previously fuelled by historically low interest rates the expectation is that they will remain low in the short to medium term. Again, supply for the owner/occupier remains extremely small and in the light of perceived economic turmoil we were pleasantly surprised when we put a building on the market in Euston in October at just how much interest there was - we were anticipating that a shortage of available funds may have an effect on the popularity of this product, but this was not the case.
In reality we are in a strange situation where the 'last days of Rome' mentality is being talked about but not actually happening. The lack of supply of new space into the West End offices market has given landlords no reason to consider reducing their asking rentals, and this is likely to continue over the next 12 months. Thereafter, I think it is realistic to expect that both landlords and outgoing tenants may have to be a little more commercial in their approach to closing a deal. 2009 will be interesting - particularly in light of the fact that rentals do not tend to go up or down by £1 per sq ft - they tend to move by £5 per sq ft or more! Generally it is outgoing tenants keen to dispose of their product that lead the market down and landlords tend to follow that: this may be accelerated by the government's intention to charge Rates on empty buildings - it's one thing to have a building empty and costing you little or nothing and another to have it empty and costing you money!