London’s West End office market is a tale of two sectors. Mayfair, St James’s and Soho are like traditional in-town markets, lacking space for development, no big floorplates and driven by refurbishments. In addition, rents are high and climbing, and only the most prestigious and wealthy occupiers can afford to move in.
Victoria and Paddington, which are like out-of-town markets, is where the major development activity is happening. Several landmark buildings are due for completion this year in these areas and will bring with them those much-desired large floorplates.
However, lurking behind this tale of two sectors is one big problem. The development pipeline in the world’s richest property market, where rents last year hit £80 per sq ft, is about to dry up. Occupiers will face rising rents and those looking for floorplates larger than 20,000 sq ft will struggle to find them.
This is because, after several years in the doldrums, the West End office market is finally turning, and demand is picking up. According to Cushman & Wakefield Healey & Baker, the total year-end take-up figure for 2004 for buildings of more than 5,000 sq ft was 3.03m sq ft, up from 1.95m in 2003.
This is good news, although there is also a negative effect on the market. “The strong levels of take-up recorded for the final quarter have also had an impact on supply levels across the West End market,” says Knight Frank’s Central London Quarterly report for Q4 of 2004. It adds: “Current office space under construction is 2.51m sq ft, but two-thirds of that will be completed in the next year.”
At the moment, there is around 7.5m sq ft on the market. Most notable is Land Securities’ massive 650,000 sq ft Cardinal Place mixed-use scheme at Victoria, SW1.
According to Nick Berrill, director of West End development for Atisreal, after this, “there will be a lack of new stock in 2006”. In footage terms, Berrill’s “lack of stock” translates into only 1.3m sq ft of development coming through in 2006 and 2007.
Figures provided by CWHB show that28 West End developments are due for completion in those two years, but only eight of them – including the 78,660 sq ft 190 Great Portland Street, W1, and the 73,850 sq ft The Curve, at 30 Warwick Street, W1 – will be finished next year.
Bigger projects
The remainder, just over 1m sq ft, will be finished in 2007. Among them will be Paddington Central, W2 — the Sheperd Robson Building being the largest at 250,000 sq ft – and 40 Portman Square, W1, at 115,000 sq ft.
The dearth of development is a result of the difficulties that have been encountered in getting finance for the bigger projects. “It’s not easy to raise finance for these larger schemes,” says Guy Taylor, head of West End agency at CWHB. “Obviously, the banks had their fingers burnt in 2000 and 2001.”
Mike Hussey, managing director for London Portfolios, agrees. “If you were to deliver buildings in 2006, developers would have had to start in 2003. At that time, there was less enthusiasm from the banks to finance projects. But now the market is improving and the lack of development has started to show.”
With demand now on the increase, the key question is what impact the lack of stock will have on the market.
First, is there enough demand from occupiers to get the market really worried? Yes, says Taylor. “There’s now serious demand coming through,” he says. As evidence, he points to a report by the Centre for Economics & Business Research, published last year. This forecasts that there will be an estimated 125,000 new jobs in London by 2008.
Taylor comments: “This growth is set to come from the financial services sector and the business services sector, such as management consulting and IT consultancy.”
He points out that if any of these potential businesses were to seek to house their employees on a single floor, they would have problems because of the scarcity of large floorplates in the West End.
“If a company wants a floorplate of 20,000 sq ft or more, there are only 12 buildings which can offer that type of accommodation,” says Taylor. He adds that, of 19 schemes completing this year, only LandSec’s Cardinal Place offers buildings with large floorplates.
Not everyone shares Taylor’s concerns about the dearth of big floorplates. “I don’t see it as a problem,” says Simon Glenn, a partner in Strutt & Parker’s West End business team. “I can’t remember the last time you had a tenant that wanted 100,000 sq ft. I believe the best types of scheme being built for the West End in-town market are those of 5,000-10,000 sq ft. That size would cater to the majority of West End tenants.”
He adds: “If you look at all the people who went to Paddington, they are not typical West End tenants.” Taylor says tenants looking for bargains will be attracted to the edge of the in-town markets such as Paddington, where you can get rents of £40 per sq ft instead of £55.
Companies would be well advised to grab developments at such prices now, while they can. Ken Cohen, partner at DE&J Levy, predicts that the lack of development will see rents rise. He believes that, where rents average £55-£60 per sq ft, they will go up by 10% over the next couple of years. “All we need is to have a jump in corporate activity and a take-up of the few buildings that are on the market, and that would drive rents up,” he explains.
So what will happen with the pipeline in future? Glenn says the pipeline is constrained and will continue to be so. “People will take the risk of building because they see the market improving,” he says, “but the way Westminster planning operates, it’s going to be really difficult to turn on that pipeline.”
Taylor is optimistic. He is hoping that, political decisions aside, banks will regain their faith in the market and start once again to finance development. “After 2007,” he concludes, “when the banks have seen the amount of occupier interest, they will be more amenable to developers, and that is when we will see another boom in development.”
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Office rents ●Paddington, £40.50 per sq ft (achieved on the 15,000 sq ft Bulldog at The Point, W2 (Orange sublet, September 2004) ● Victoria, £54 per sq ft (achieved on the 3i deal for 65,000 sq ft at Cardinal Place, SW1, in January) ● Mayfair/St James, £80 per sq ft (achieved on the Multiplex deal at 40 Berkeley Square, W1, last year) Large floorplates The redevelopment of the 450,000 sq ft Michael’s House in Baker Street, W1, is one of the few buildings to provide large floors Supply Little stock is coming on stream. There will be only 1.5m sq ft of space constructed between now and 2007. As a result, rents are forecast to rise from £55-£60 per sq ft to £60-£65 over the next two years |
