Tremors from the shake-out of the US hi-tech sector are being felt in the UK’s Thames Valley, as Cisco Systems this week joined other global telcos scaling back their property plans. Catherine Wheatley investigates
It was hailed as one of the property deals of the decade, but less than 12 months after Cisco Systems bet on the internet bubble by committing to massive new offices in the Thames Valley, the biggest-ever prelet outside London is looking distinctly overambitious.
This week Cisco confirmed rumours of a sharp fall in earnings by posting a profits warning and announcing plans to sack a quarter of its global workforce. The news caused a further slump in hi-tech shares on London and Wall Street stock markets.
Since last July, when the IT giant agreed to rent and take options on more than 115,600m2 (1.2m sq ft) at Prudential’s GreenPark in Reading, Cisco’s shares have plunged by 75%. A spokeswoman for the computer networking company confirms that it is re-evaluating its global property requirements as bankruptcies among its clients mount. “Inevitably, changes are made to keep our portfolio current. The slowdown in the economy may well mean that we will adjust the scale or timing of various projects around the world,” she says.
Cisco, which has been hit by the failure of several digital telephone clients in recent weeks, has options on 57,319m2 (617,000 sq ft) which are now due in the summer, as well as the 56,390m2 (607,000 sq ft) it has already preleased.
Unfortunately, Cisco is not the only hi-tech occupier in the Thames Valley to be looking at downsizing. Motorola, once said to be close to taking offices at Farnborough Business Park, has now called off its hunt for new premises after making more than 3,000 redundancies worldwide. Another two unnamed quoted US telcos, both advised by Healey & Baker, have also shelved their UK expansion plans.
Across the South East, the slide in the dot.com and telecoms sector is having an impact on the property market. eToys, the online retailer once regarded as a serious threat to Toys R Us, last week assigned its London offices after closing for business earlier this year. Although the agent involved would not confirm the figure, it is thought that the new rent is rather lower than the old.
Cosmo.com, an internet delivery company, is another hi-tech tenant that has acquired and then assigned its space in London’s King’s Cross all within 12 months.
Along the M40 at Chalfont Park, electronics company Sensormatic has put its 3,716m2 (40,000 sq ft) of offices straight back on the market after downsizing prevented the company from taking possession of its new space. And at Bartleywood near Basingstoke, cable communications company NTL has put two buildings of 7,432m2 (80,000 sq ft) and 4,180m2 (45,000 sq ft) up for rent again following a reassessment of its expansion plans.
The tremors being felt in the South East have their origin on the other side of the Atlantic, where San Francisco’s office market has been shaken by the seismic shift affecting the overhyped hi-tech industry.
Two years ago, the competition for space in downtown San Francisco was so intense that some dot.com entrepreneurs were offering more for offices south of Market Street – the traditional dividing line between prime and fringe locations – than financial institutions were paying for offices in the central business district.
Now struggling internet companies are being forced to sublet surplus space for half the original rent. One internet tenant at Tishman Speyer’s Market Center on Market Street, Atlanta-based iXL Enterprises, has cut the asking rent from $82 per sq ft to around $40 per sq ft, according to a recent report in the San Francisco Business Times.
Unique set of circumstances
But West Coast agents believe that a unique set of geographical and economic circumstances have conspired to produce a market collapse. The total amount of space available in the city, together with the Bay Area to the east and Silicon Valley beyond, is estimated at just 125m sq ft, around the same total as downtown Manhattan’s total office stock. In the city alone, the figure is around 66m sq ft. At the same time, the region is highly dependent on hi-tech companies and is a magnet for start-ups and spin-offs.
As the dot.com boom took off, rents rose dramatically. A well-travelled market anecdote relates the story of a garage in the SoMa area that was converted into offices and let two years ago at an eyebrow-raising rent. Today it is used as a garage again – because car space is now easier to shift than trendy conversions.
“Everyone is shocked at how fast the decline has happened,” says Wendy Mills, a real estate analyst at Jones Lang LaSalle in San Francisco. “But the flip-side is that rents went up quickly too.”
At the moment, the best office blocks in the most sought-after locations in the central business district are fetching $60-$70 per sq ft, she estimates – around 35% less than at Christmas.
According to Mike Seifer, Jones Lang LaSalle’s senior vice-president of leasing, dot.com companies treated real estate expenditure as just one small item on a vast corporate shopping list that included voluminous staff budgets and generous expense accounts. “Companies were taking space on projections of future growth because they thought they could afford to,” he says. “Now, not only are they not growing but they are laying off as well.”
Firms most affected by the West Coast slump are dumping space on the market at an unprecedented rate, according to JLL, which estimates that there is now 3m-3.5m sq ft of offices up for subletting. Just how big a reverse premium is being paid and by how much the rents achieved are lower than the previous figure are difficult to pinpoint, but most agents believe they are significant.
“The cost of real estate became inconsequential, so tenants were prepared to spend almost anything. Now cash is very important, so they will sublease at anything just to get the money,” observes Seifer.
Mass collapse predicted
Despite the brave faces in the agency community, the market is unlikely to pick up in the near future. A report published at the end of last month by Cushman & Wakefield New York and the Rosen Consulting Group predicts that 80% of the remaining dot.com companies in the Bay Area will collapse over the next 12 months, making 30,000 redundant and putting a further 4m sq ft of offices on the market again. The forecast is based a survey of the debts and projected profits of 150 quoted web companies.
“It’s going to be a tenant-favourable market for a while,” observes Seifer with some understatement. “There won’t be too much activity until the economy picks up.”
Not surprisingly, UK agents play down the possibility of a similar crash along the M4 corridor, where Amazon.com in Slough as well as Scoot.com in Uxbridge and a handful of other well-known internet companies have their offices. “There is definitely retrenchment in the Thames Valley but the dot.com effect did not hit the market in the same way as it did Silicon Valley,” says Colliers Erdman Lewis director Jan Thompson, who advised Cisco on its GreenPark deal. “We won’t see things deteriorate in the same way as they have done over there.”
John Izett of Rogers Chapman expects a short-term adjustment but is optimistic about the longer term. “Last year was exceptional. Nobody took seriously the rents paid by telcos for switching facilities and there is little evidence of a rush into speculative development on the back of the IT boom.”
He admits that it is not yet clear how much space will be returned to the market as firms consolidate but points to research by the Merrill Lynch Techstrat survey published in January, which predicts 13% growth in IT expenditure for European companies.
Economic development agencies that monitor start-ups and closures in the region, such as SEEDA and London First, agree that the dot.com downturn is unlikely to have a disastrous impact on the market, mainly because the sector is relatively small compared to the total size of the market. Unlike Silicon Valley, which became a magnet for dot.coms, their customers and their suppliers, large computer companies still dominate the Thames Valley.
The worst shocks are more likely to come from problems in the software and telecoms sectors, where giant US-based companies are scaling back their European expansion plans as their share prices slide.
Inward investment slows
“Over the first quarter, there was definitely a slowdown in new US projects being set up in the UK – from two-person operations right through to the larger companies,” says Seeda’s head of project management, James Edwards, who estimates that the number of overseas businesses setting up in the region has fallen by 40% since the first quarter of last year.
Of that figure, the vast majority, he says, are US telcos and software companies. “We’re expecting more of the same in the coming months and some of the projects coming through are smaller than they might have been. The implications are certainly that there is more space coming on to the market.”
The story is only slightly less gloomy in the capital, where Anna Barlow at inward investment agency London First confirms a slight fall in the number of US companies expanding into the UK. “Project periods are extending as companies carry out more extensive reviews before committing themselves,” she adds.
But agents believe that it is unfair to compare the first quarter of 2001 with last year’s millennium boom. “No-one has suddenly gone bankrupt,” says Chris Hiatt, head of National Office Agency at Jones Lang LaSalle. “Confidence is bound to be affected by what’s happening on the stock market, but until there’s a huge occupier dump in the market we’re not going to worry. Last year was a huge year so I’m hoping we can match what we did in 1999.”
But if giants like Cisco can be caught by the aftershocks from Frisco, UK agents’ optimism may be short-lived.
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Cisco’s new offices at GreenPark, Reading |
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Options to double the company’s office space must be taken up later this year |
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Even before this weeks’ profit warning, Cisco’s shares had slumped by 75% since last summer |
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Source: Bloomburg |
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Thames Valley office space 2001 (available and under construction) |
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The volume of available space jumped by 23% in the first quarter this year |
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Source: Healey &Baker |
