News

Last Word: Out with the old, in with the new

News

Tom Pilkington

13 September 2014

Investment/finance, Offices

The question of when we will see the top of the market has been asked countless times over the last few months.

For the West End – in the new-build market, at least – it appears that we have now surpassed the previous peak. Average rents on new-build or refurbished space currently stand at £77 per sq ft, which is ahead of the £76 per sq ft that was the average for 2008.

There are extremes within the data that makes this average. For example, should you manage to find yourself a nice new or refurbished space in Mayfair then you’ll most likely fork out at least twice what you would in Euston or Paddington. KPMG’s preletting of , for a rumoured £125 per sq ft in May contrasts sharply to the £65 per sq ft paid by Santander Asset Management at 10 Brock Street NW1 in July, and sums this point up well.

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While we may have exceeded the previous peak in the new/refurbished market, we are still a long way behind in the secondhand market. The last peak in the West End secondhand figures came in 2008 when the average rent was £60 per sq ft, but since the market bottomed out at £41 per sq ft in 2010 rental growth has been sluggish and still only stands at £11 per sq ft more now, at £52 per sq ft.

This is a surprising situation for a market with an availability rate at a lowly 4.7%. The situation is made all the more surprising as, of the space available at the end of Q2, 40% was secondhand which makes that section of the market even more constrained than the portion of the market that accounts for new and ready to occupy space, and under construction space (42%).

Simple supply and demand would suggest that there should be more growth in the market with the least supply, unless of course there is greater demand for the other product.

Demand for new or refurbished space outstripping demand for secondhand space, is why I think we are still a little way off the top of the market. In this constrained market, occupiers have the confidence to be shelling out on the more expensive option rather than to settle for the cheaper.

Expect the rents to keep going up through to the end of the year at least.

The question of when we will see the top of the market has been asked countless times over the last few months. For the West End – in the new-build market, at least – it appears that we have now surpassed the previous peak. Average rents on new-build or refurbished space currently stand at £77 per sq ft, which is ahead of the £76 per sq ft that was the average for 2008. There are extremes within the data that makes this average. For example, should you manage to find yourself a nice new or refurbished space in Mayfair then you’ll most likely fork out at least twice what you would in Euston or Paddington. KPMG’s preletting of , for a rumoured £125 per sq ft in May contrasts sharply to the £65 per sq ft paid by Santander Asset Management at 10 Brock Street NW1 in July, and sums this point up well. While we may have exceeded the previous peak in the new/refurbished market, we are still a long way behind in the secondhand market. The last peak in the West End secondhand figures came in 2008 when the average rent was £60 per sq ft, but since the market bottomed out at £41 per sq ft in 2010 rental growth has been sluggish and still only stands at £11 per sq ft more now, at £52 per sq ft. This is a surprising situation for a market with an availability rate at a lowly 4.7%. The situation is made all the more surprising as, of the space available at the end of Q2, 40% was secondhand which makes that section of the market even more constrained than the portion of the market that accounts for new and ready to occupy space, and under construction space (42%). Simple supply and demand would suggest that there should be more growth in the market with the least supply, unless of course there is greater demand for the other product. Demand for new or refurbished space outstripping demand for secondhand space, is why I think we are still a little way off the top of the market. In this constrained market, occupiers have the confidence to be shelling out on the more expensive option rather than to settle for the cheaper. Expect the rents to keep going up through to the end of the year at least.