Back in the spring, it was not just the trees and borders that were showing signs of growth. Office market commentary too had a liberal sprinkling of the “green shoots of recovery”. But it seems the market upturn, like the August weather, was a bit of a damp squib.
“A lot of people have over-forecast the recovery,” says Philip Hobley, partner at Knight Frank. Simon Calvert, director at Colliers CRE, agrees: “The statistics are moving in the right direction, but the sentiment outran the statistics.”
The false dawn has, however, produced a more pragmatic outlook. “On the agency front, the idea that the office market is improving is purely illusory, fuelled by the strong investment climate and rents obtained on high-profile developments, but without bearing on actual take-up or supply figures,” says Simon Knights, partner of Strutt & Parker’s West End business team. Hobley is equally under no illusions about the state of the market, which he describes as “stable, not exciting, prone to quiet patches and still tough”.
So what position is the West End office market really in, and just how elusive is the recovery? Is there evidence of any improvement?
A thorough scrutiny of the statistics shows that there are signs that the market is cautiously turning a corner. DTZ Research, for example, points to an increase in take-up so far this year. “Last year was the worst year of take-up since 1983,” says Andrew Barnes, director at DTZ. “But take-up in Q2 of 2004 was 13.5% higher than Q2 in 2003.”
EGi‘s London Office Database figures also indicate a rise in take-up. Taking figures for the first half of this year, compared with the first half of 2003, EGi calculates an increase of around 35% (see graph, p116).
Cushman & Wakefield Healey & Baker’s head of West End agency Guy Taylor highlights the fact that the number of deals completed this year that secured rents of more than £50 per sq ft has so far increased by 15% compared with last year.
Rent-free periods in new leases have also been scrutinised for possible changes. When the market was at its worst, landlords were giving away two years to secure tenants, and there were rumours of deals that included three years rent free.
“Rent-frees and inducements are coming in a bit. Landlords are not giving so much away,” comments James Danby, partner at Knight Frank. Indeed research by Drivers Jonas shows that the figure has declined since May (see graph above).
Taylor also reckons that quoting rents are rising – surely a sign of increasing confidence from landlords? He uses 16 Berkeley Street and 50 Berkeley Street, W1, as examples. The former has seen quoting rents rise by £7.50 per sq ft to £65 per sq ft, while the latter has seen a rise of £5 per sq ft to £60 per sq ft.
As for achieved rentals, figures of £80 per sq ft have graced the headlines, but agents are not reading too much into them. As Knights explains: “The high-profile lettings and enhanced rents are on new space or high-quality refurbishments, such as 40 Berkeley Square, 1 Cavendish Place and 10 Grosvenor Street, W1, but this does not equate to rising rents across the board.”
These rental levels have also been achieved on small lettings of around 5,000 sq ft, and in a pocket of the West End. There are a number of deals in the pipeline that agents will be watching closely as a test of market conditions.
Music company
For example, computer and music company Apple is rumoured to have 20,000 sq ft under offer at 1 Hanover Street, W1, for a rent of £65 per sq ft. There is also speculation that oil trader Vitol has 30,000 sq ft under offer at Belgrave House on Buckingham Palace Road, SW1, at a rent rumoured to be £55 per sq ft.
DTZ’s Barnes calculates that there is some 900,000 sq ft of space in the West End under offer to tenants. If these deals are finalised, it will certainly help Q3 take-up figures.
What the market needs to really give it a shove are some headline-grabbing, big space deals, at the middle rent ratio of £50 per sq ft plus. There are the “vultures”, as CWHB’s Taylor describes them, who are looking for a bargain at the bottom of the market.
And at the top end, there are cash-rich companies, such as the hedge funds, which have been picking off some of the top spec, small floors for top rents.
This leaves a gap in the middle that is waiting to be filled. “We want the corporates coming in, saying they want 50,000 sq ft and then paying £50 per sq ft plus for it,” comments Taylor. Hobley agrees: “We have got a lot of typical West End churn in smaller units, but we are not seeing the big deals, the big consolidations. These make the headlines and feed back into sentiment.”
But we all know where sentiment got the market earlier in the year. “When it is going to come back, and how it is going to come back, is difficult to call,” admits Hobley.
As we enter the crucial autumn period, let us hope that the agents’ patient and pragmatic approach to the possibility of a recovery is rewarded with a bountiful crop of deals.
