Close to the bottom The M25 north-west has never been a deep pool of office activity, but even teacups can have their storms. Simon Jack reports
Demand and rents have both declined in the north-west quadrant of the M25. But the area has never seen a huge amount of new office supply, so there are hopes that the market will not deteriorate further.
There are signs of some demand returning in Hertfordshire. Most of the new space that is available in the quadrant is in Chiswick, which many agents believe continues to be a top office location.
Kevin Hawthorn, partner of newly formed agency Hanover Green, says: “No one knows if we are actually at the bottom of the market, but it is not too far away.”
Strutt & Parker partner Jamie Renison adds: “In some centres, rents can’t really go lower. Supply is not out of control, and there hasn’t been a huge number of tenants releasing space back onto the market.”
Others will be hoping that is true. According to research from Knight Frank, rents have fallen by an average of 12% across the quadrant since the peak of the market. In the first half of 2009, only Watford saw headline rents remain the same as in H1 2008, at £21 per sq ft.
But it is the relatively low level of supply that has fuelled agents’ optimism for a quick recovery. Knight Frank’s research shows that available space in the quadrant increased by 3% between June 2008 and June 2009, compared with an average of 13% for the M25 as a whole, and there are no signs of further development – something that is welcomed at present, but which could constrain the market in future.
Knight Frank’sRyan Dean says: “It could take 18-24 months for developers to decide to go ahead with any new buildings, and a further two years before anything is actually delivered.”
Luckily, around 80% of new space is in Chiswick, including the recently completed 170,000 sq ft Building 9 at Stanhope’s Chiswick Park. Knight Frank says this is the only location where brand-new buildings have been let this year. Five such deals in the west London suburb in the first half accounted for more than one-third of the entire take-up for the quadrant over that period.
Many agents think the area will remain a strong location. Savills director Jonathan Gardiner says: “Companies looking to move out of central London and reduce overheads see the area as an attractive place.”
This has not stopped rents there falling in the short-term, however. BNP Paribas Real Estate’s South East office market Q2 2009 calculates that they fell from £36 to £33 per sq ft fromthe first to the second quarter of this year. Rents are under pressure in Uxbridge as well, which is another location seen as a bright spot for the future. The final terms of a deal at Goodman’s 48,000 sq ft Parkview in Uxbridge, where Tetley Tea is under offer on 8,500 sq ft, are likely to be well under the £31 per sq ft achieved earlier this year in the town.
According to Knight Frank, overall take-up of 156,000 sq ft across the quadrant in H1 was 26% down on the year before. But there are areas which are beginning to see increased activity.
For example, in Hemel Hempstead, Epson has taken 52,000 sqft at Westside, a 180,000 sqft building released onto the market by former occupier BT. The printer maker is paying £17.50 per sq ft on a 10-year lease with 15 months rent free. Also, construction company BAM took 22,000 sq ftat nearby Breakspear Park at £20.50 per sq ft on a 10-year lease.
Considering relocation
Espon was an existing Hemel occupier,and others nearby have also chosen not to move, including Currys owner DSG, which regeared its lease. However Mothercare, based in Watford, is considering relocation, and Coca-Cola is also thought to have a requirement.
Jones Lang LaSalle director Guy Parkes says: “There is a feeling that some occupiers are positioning themselves for the upturn, while others are upgrading to smarter buildings but at the same rent.”
Another deal in Hemel involved the purchase of 28,000 sq ft of offices at Blythe House by housing association Hightown.
But according to Lambert Smith Hampton director Claire Madden, despite these positive signs, there is still a long way to go before the market returns to normal.
She says: “Incentive packages are huge, and you might have expected to achieve £19 per sq ftat somewhere such asWestside about 18 months ago.”
So it is not surprising that, where there have been lettings,they havesometimes been theresult of lower rents. For example, at Centennial Business Park in Elstree, six units of between1,500 and 2,000 sq fthave gone under offer since the beginning of August, but only after rents at the development were lowered from £25 to £20 per sq ft.
Diverse market keep industrial sector buoyant
Industrial demand in the north-west M25 has not been as badly hit by the recession as in other parts of the region, and the A40 in particular is still seen by the property industry as a healthy market in the long term.
SEGRO regional director Phil Redding says: “Although there is space available along the A40, it never suffered the oversupply that Heathrow did, and there is a reasonable amount of take-up.”
Jones Lang LaSalle’s Jody Smith says that the level of incentives has stayed relatively low along the A40, and are around 12-18 months rent free on a 10-year lease, compared with 24-30 months in Heathrow. “The A40 is a diverse market, with occupiers from the food, distribution, energy and pharmaceuticals sectors,” he says.
Adidas is among those to take space, signing up for a 20,000 sq ft unit at Canmoor’s Vision development in Park Royal on a 15-year lease. The terms of the deal are confidential, but the sports goods firm is thought to have favoured a contribution to fit-out rather than a rent-free period.
Research from Colliers shows that take-up is edging up on last year in many locations in the quadrant, but that supply is also increasing. However, agents report that brand new space is not being replaced and its availability is starting to dwindle.
In Watford, for example, Lambert Smith Hampton director Chris Smiddy says that there is now only a small selection of secondhand space in the town. “There hasn’t been any new industrial development since 2007,” he says.
In Hemel Hempstead, where a number of competing small-unit schemes came to the market simultaneously, demand has been stimulated by landlords cutting rents and freehold prices, leading to more than 20 deals at St Modwen’s Maxted Park, CBRE Investors’ McDonald Business Centre and Chancerygate Business Centre.
For example, at Maxted Park, freehold prices have been lowered from £160 per sq ft to £110 per sq ft, and rents from £9-£10.50 per sq ft down to £6.50 per sq ft – nine of the 10 units there are now under offer.
By contrast, there has been a shortage of units in the 20,000-40,000 sq ft size bracket and, where stock has become available, it has gone quickly. For example, F&C REIT let a 28,000 sq ft warehouse to Photologic within three months of it coming to market.
Hertfordshire’s big shed market has been very quiet in terms of both supply and demand, and there have been no major deals for some time. Gazeley has a 167,000 sq ft building available in Hemel Hempstead, while the nearby 260,000 sq ft M1stral 260 building is for sale. However, Blackstone has abandoned plans to rebuild the fire-damaged, 466,000 sq ft Mammoth building, and has sold the site to civil engineer J Murphy & Sons.
Market at a glance
Prime rents across the quadrant have declined in most locations, dropping in Hemel Hempstead from £8.50 per sq ft last year to £7.75 per sq ft today, and in Watford from £7.50 per sq ft to £6.75 per sq ft. However, in Uxbridge, rents have remained stable at £10.50 per sq ft.
Take-up was up to 110,000 sq ft at the end of August in Hemel against 94,500 sq ft for the whole of 2008. In Watford, it is already 132,000 sq ft this year compared with 87,000 sq ft for 2008. At the same time, supply has increased in Hemel, St Albans and Watford since August last year, but has fallen by 8.6% to 290,000 sq ft in Uxbridge.
Investors have shown an interest in the quadrant, with CBRE Investors buying the 79,000 sq ft Kew Bridge Distribution Centre in Brentford for £7.5m, an 8% yield, and ING Real Estate purchasing the 310,000 sq ft Powergate Industrial Estate for £41m, a 7% yield.
