The decision by London’s Organising Committee for the Olympic Games to take space in Canary Wharf sent out a signal. But it was not the one that onlookers expected the promoters of the Games to give.
Many expected LOCOG would have entered into the spirit of the Games and based itself closer to its epicentre. With Stratford office space thin on the ground, many thought this meant Building 1000, at Royals Business Park.
Instead, LOCOG chose 1 Churchill Place, subletting up to 200,000 sq ft from Barclays at the bank’s Canary Wharf headquarters. Meanwhile, the speculatively developed Building 1000, completed in October 2001, remains glaringly free of a tenant.
Long term viability
The decision is a blow to Stratford and its sub region, especially when business is still considering the long term viability and attractiveness of east London.
“I think it was a surprise that LOCOG didn’t take space at the Royals Business Park,” says Jonathan Saxon, head of Knight Frank’s Docklands agency. “The Olympic Delivery Authority and LOCOG are organising the Games. It was thought they’d be regenerating offices and building in the borough where the Games are to held. It would certainly be a more economic option.”
This poses some interesting questions. Will LOCOG’s decision set a precedent, provoking other occupiers to opt for the established, if not more expensive, Canary Wharf? And if it does, once the bunting comes down and the big clean up begins, will this have provided just a short-term boost or will occupiers stay to rejuvenate the Docklands?
Times have been tough in the area. Figures from the London Office Database show take-up rose by a third in Q2 this year, although this was from a very low base. In fact, the rise to 160,000 sq ft represented just a fraction of the 1.2m sq ft of new and refurbished stock available.
This figure was 11% less than last year’s total availability, but only because construction ground to a halt in 2004. With vacancy rates now at more than 14%, there are still a lot of new buildings sitting empty.
As a result, much has been made of the Olympic effect. Agents believe occupiers will flood into the area. As Stratford’s nearest central business district, they chorus, Docklands will surely benefit.
Rod Parker, head of Docklands agency at Atisreal, is one. “There have been a number of interested parties enquiring on the strength of the London 2012 bid,” he says. “There are not many options in Stratford, and Canary Wharf can satisfy the demand.”
Tenant activity in Docklands has been increasing gradually, says Parker, and the Olympics will be the “icing on the cake”. “The City has been beastly for four years, and we are now reaching a stage where it is starting to roll again,” he says. “Within five years, the vacancy rate will be below 5%.”
Parker says areas beyond the wharf, such as Exchange Tower, South Quay and East India Docks – able to offer part floors with flexible leases – will also benefit.
However, history tells a different story. Research into former Olympic cities shows they had a relatively modest effect on nearby office markets. Admittedly, Barcelona, Sydney and even Commonwealth Games host Manchester saw some benefits, but mainly from a boosted reputation. London is already one of the most widely visited cities in the world.
An Experian report, commissioned by the BPF, put this more bluntly. “It might be argued that very few New York investment bankers, attracted to London because of its theatres and restaurants, would be any more likely to come because of an aquatic centre in the East End, or that a new athletics stadium in the Lea Valley would generate a rush for office buildings in the immediate surrounding area,” argues the report’s author, Richard Holt.
But he adds, that would be to miss the point. “The biggest single impact of a successful Olympics bid might be the fact that it helps keep Europe’s financial sector centred on London,” he says.
For Docklands, with its rash of financial institutions, that is good news. Of the lettings in Q2, two of the biggest were to financial institutions. Northern Trust signed up for a further 36,000 sq ft at 50 Bank Street and TotalISA took 26,000 sq ft at 10 Upper Bank Street.
New set of occupiers
By the time the Games open, agents estimate that rents in Docklands could have reached £20 per sq ft – £3 more than today’s levels, and returning them to 1999’s. Even then, however, rents would still be lower than 2000, when they approached £35 per sq ft.
The first takers of space drawn by the Games will undoubtedly be those directly related to organising them, including media, finance and admin staff, but will these stay long term, or come 2013, will Docklands be casting around for a whole new set of occupiers?
Comparisons with Barcelona are difficult. The city was widely accused of overbuilding ahead of its Games. According to Jones Lang LaSalle, in the four years preceding the Games, around a quarter of the city’s CBD stock – around 850,000 sq ft of space – was built. Vacancy rates rocketed from 0.7% in 1989 to 10.4% in three years, and rents halved. It took a further three years for the market to recover.
Some commentators argue that countless EU grants plus the country’s eagerness to assert its membership of the EU, were factors behind this. Roger Cooke, head of Cushman & Wakefield Healey & Baker in Spain, however, blames the economic cycle. “If there was overbuilding, it wasn’t on the back of the Olympics. For example Madrid was in the same cycle.”
He admits that, in the wake of the Olympics, one or two buildings were difficult to let, pointing to the Art House Hotel, and the 322,920 sq ft offices at Barcelona’s Mapfre Tower. But adds: “There was a lot of euphoria, and that can lead to misjudgements, but there was good planning for the Games.”
Whatever the reasons for Barcelona’s glut, by 1996, Atlanta had learnt the lesson. JLL figures record a relatively modest 215,280 sq ft of the city’s office space leased on a short-term basis in the years’ preceding its Games, out of some 23.7m sq ft in its CBD.
Cooke, however, points out that, in the long term, the Games were positive for Barcelona. “Firms that came to Barcelona to service the Olympics realised it was not such a bad place to run a business, and stayed for a long time. However, I wonder if that will be the case with London, because it is already pretty mature.”
So will Docklands developers also be able to contain their excitement? Atisreal’s Parker believes they will. “Nobody is going to lose their heads over this,” he says. “There will be a rational and sensible approach, and development will come forward in tranches that are lettable. We’ve done the alternative before, and we’ve learnt the lessons.”
Parker says that possible contenders for speculative development are land around Canary Wharf’s 1 Churchill Place, Hertsmere House – owned by a Kuwati consortium – and Fidelity’s 780,000 sq ft London Millharbour, which has been on the drawing board since 1999.
Infrastructure improvements
“The Kuwaitis are the sort of people who don’t want money sitting in the bank. The property cycle is in our favour this time, and that could be our saving grace,” he adds.
But there are other lessons to be learnt. The Olympics is directly attributed for closing a huge gap in the office market between Barcelona and Madrid, leading to a leap in property values in the Catalan capital.
That plays into the hands of Stratford far more than either Canary Wharf or the City. Infrastructure improvements in the Lower Lea Valley will provide a link between Canary Wharf, the City airport, the Royal Docks and Stratford. This will result in a significant increase in office accommodation and what Experian’s Holt calls a coherent business district.
Should occupiers flow into the area, Canary Wharf has little chance of expanding northwards. So will it lose out as tenants look to the surrounding area?
Emma Goodford-Broer, partner at Knight Frank’s national offices agency, who is marketing the nearby Royals Business Park, says she has already seen a marked improvement. That, she believes, will lead to immense development in the surrounding area.
In spite of LOCOG’s decision, Goodford-Broer says there has been a pick up in general enquiries as all eyes focus on the area.
“When going from Canary Wharf into the Isle of Dogs, the quality of space drops,” says Goodford-Broer. “That hasn’t helped rental growth. The Olympics sets a new platform, and it will create a huge critical mass. There will be enormous demand for space in the surrounding area.”
Whether this will provide true competition for Canary Wharf is debatable. Knight Frank’s Saxon believes LOCOG’s decision has reaffirmed interest in Canary Wharf. “The LOCOG deal says it all,” he says. “There are always going to be people who want to work with the committee, and that means they want to be near them.”
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Local agents predict vacancy rates will drop quickly |
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Rents (new builds) |
£38.50 per sq ft, down nearly £3 from Q2 last year |
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Construction starts |
none since Q2 2004 start on 283,000 sq ft |
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Vacancy rate |
14.2% |
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Source: London Office Database |
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