by Karen Lennox
Herring Baker Harris is expecting a permanently higher vacancy rate in the City office market — a phenomenon which it is dubbing the “permafrost” effect.
As the tenant base continues its decline the best new space will be absorbed most quickly, leaving secondary and poorer-quality properties to make up an increasingly large proportion of the vacant space available.
While the oversupply of space will still put downward pressure on rents throughout 1992, tenants can expect to receive the greatest concessions from landlords in the form of flexible lease packages. HBH foresees the 15-year lease becoming a more common phenomenon, with rent-free periods and break clauses continuing to feature widely.
Despite the downward pressure it is not envisaged that rental values will fall substantially, but it will still be the next decade before top rents return to the levels reached in 1989-90. However, modest growth in the rents on good-quality space will ensure that the market remains relatively stable in the medium term.
HBH argues that the persistently high overall vacancy rate will inevitably have a dampening effect on rental growth, while, by the second half of the decade, a gradual flow of new developments will increase top-specification supply. Also, occupiers will continue to look outside the City for suitable space if their requirements cannot be fulfilled by existing City properties, which will add to a further deterioration in the market for secondary space in the City itself.
Overall, demand will be generated by recirculation — as tenants upgrade their accommodation by moving from poor to good space — rather than by an expansion in the tenant base.
