Availability in central London shot up at the end of last year, but agents put this down to a sudden spate of subletting by companies with excess space. They predict a return to normal service shortly. Stacey Meadwell reports
Statistics can make scary reading, especially for agents working in the City and the West End. Availability rose by 21% in the West End during the fourth quarter of 2001, according to Healey & Baker’s figures. In the City, availability increased again by 42% on top of the 53% rise seen in the previous quarter.
And that is just for starters. According to Insignia Richard Ellis, of the units over 10,000 sq ft that came onto the market, more than half was tenant release rather than landlord controlled.
In the West End, says H&B’s Guy Taylor, 75% of the space that came onto the market last year arrived between March and September and 60% of that was tenant release.
Different viewpoints
But these figures do not tell the complete story. Economic slowdown in the US and the UK, particularly in the telecoms and dot.com sectors, meant that some tenants found themselves committed to space they no longer required.
On top of this, and particularly in the City, some companies that had expanded piecemeal into new space consolidated subsequently, offloading their old space.
John Forrester of DTZ’s City office says that supply levels virtually doubled, with the dominant factor being tenants offloading space they no longer required.
However, putting the availability figures into context, there is no need to panic just yet.
Research by Knight Frank shows that, while the vacancy rate more than doubled from a 10-year low of 3.3% in 2000 to 7.7% in 2001, it is still less than half the peak of 18.4% witnessed in 1991 (see graph, p80).
Knight Frank’s head of central London research and consultancy, Sarah Bate, puts forward the worst-case scenario to show that the situation is by no means as bad as a decade ago. She says that if all speculative space now under construction or in the development pipeline, as well as all buildings at risk of tenant release, were to come onto the market at once, the resulting vacancy rate of around 15% would still be less than the peak (see graph directly above).
“Although a significant increase, it is still not as critical as in the early 1990s when developers were bringing speculative space to the market when demand was critically low,” says Bate.
Nonetheless, the amount of tenant-release space coming onto the market has had an impact and will go some way towards shaping how central London performs in the coming 12 months.
The most obvious effect is on rental levels. Knight Frank reports a 5% decrease in rents in the City, and H&B’s Taylor says that top rents in the West End have dropped from £85 per sq ft to £75.
The fall has been accelerated by the nature of the space coming onto the market.
Martin Jepson, regional director at Taylor Woodrow, explains: “Occupiers have a need to reduce their overheads and they focus on this rather than obtaining the best rent.”
Matthew Warner of Lambert Smith Hampton adds: “Tenants seeking to mitigate liabilities are putting space back on the market by way of assignment with historic passing rents without seeking premiums. Therefore, quality secondhand properties in Mayfair and St James’s are available at £10 per sq ft less on assignment.”
This is good news for occupiers looking for space. Brian Allen of Nelson Bakewell points out: “Tenants will probably get a better deal from another tenant.”
The combination of falling demand last year and tenants offering their excess space at less than market rents has distorted the rental picture.
Forrester explains: “The last quarter of 2001 had the lowest number of transactions, which creates a lack of understanding as to where rents are.”
Other agents echo this. Michael Nicholas of Nelson Bakewell says: “The trouble is there is no evidence of rents.” And Patrick O’Keeffe of Saxon Law adds: “The cross-section of quoting rents on similar buildings is confusing for tenants.”
But the real question is, what effect is this going to have in the coming months?
Taylor believes that the worst is over. “I don’t believe we will see the dumping of supply that we have seen,” he says.
Forrester adds: “Tenant-release supply occurs overnight, but similarly it can be withdrawn. It only takes two or three quarters of positive growth to reabsorb the space.”
Nicholls believes that the market has become more realistic and hopes for steady growth in the coming year. O’Keeffe broadly agrees, saying that rents cannot grow above the historical high they reached early last year.
“Rents were previously inflated. Buildings with realistic rents should see some growth,” he says.
Of space available in the West End, Knight Frank’s Archie Cowen says: “With the exception of Enron’s building, the space has been limited to relatively small-scale releases. This sort of unit size is the bread and butter of the West End demand profile and I anticipate that it will be taken up pretty rapidly, especially as most of it is at discounted rents.
“We will return to low vacancy rates over the next 12 to 18 months,” he adds.
Likewise in the City, Forrester expects a recovery towards the middle of next year.
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Vacancy rate for central London |
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Although the vacancy rate more than doubled from 3.3% between 2000 and 2001, it is still less than 1991’s |
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Source: Knight Frank Research & Consultancy |
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Availability by source |
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Occupiers can now get a better deal from tenants |
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Source: Insignia Richard Ellis |
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Balance between availability and take-up |
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Even if all potential supply came on stream at once, total availability would still be less than in 1991 |
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Source: Knight Frank Research & Consultancy |
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Secondhand availability |
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Tenants are assigning space to mitigate liabilities |
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Source: Insignia Richard Ellis |
