The first half of 2014 in the West End saw what was an emerging trend last year become a fully cemented one: occupiers signing office leases ahead of building completions. The model has long been adopted in the City, but for the first time a shortage of supply combined with heightened demand has West End tenants acting more quickly than in recent times.
Pre-building completion deals in the first six months of this year totalled 440,000 sq ft, according to EGi’s London Office Database (see below). These rumbles are the early signs of what could be a major earthquake for the West End. Alarming figures from Deloitte Real Estate show that demand in London’s plushest submarket will outstrip supply by almost 50% over the next three years – only 1.6m sq ft of new space is under construction, against 3m sq ft of demand.
Stephen Peers, West End partner at Deloitte RE, says: “Occupiers really have to start looking for offices now if they want to secure grade A space.”
The amount under construction is 27% lower than the 10-year average and nearly half that of the 3.4m sq ft under construction in the 2007 building boom. But how does the present 3.8% vacancy rate fare compared with previous cycles? It is the lowest in 13 years, according to Guy Grantham, director of research and forecasting at Colliers International. He says there is no doubt the statistics show just how busy the market is: “Delivery of space is now failing to keep pace with demand in the West End as a whole. Absorption of space in the first half of 2014 reached its highest half-yearly total for nine years at 1.2m sq ft.”
More pre-completion deals are expected by the end of this year, including a deal by Jupiter Asset Management, which is believed to be in advanced negotiations for some 50,000 sq ft at Land Securities’ 190,000 sq ft Zig Zag office block, SW1.
So with demand buoyant, the UK economy in recovery and finance more readily available, developers will surely rally round to pump in new supply. Unfortunately, it is not that simple. A significant hurdle remains: competition from residential use.
Colliers International has calculated that Westminster council received 196 applications last year to convert offices into homes in the West End core – a 13% rise on 2012. The trend has continued into 2014 with 48 applications gaining consent. The latest conversions mean that since 2001, more than 6m sq ft of West End offices have been redeveloped into homes.
Paul Smith, co-head of central London agency and development at Colliers International, says: “There will inevitably be further large areas of West End offices removed from the market in due course. While many of these may be of a secondary nature, the fact that residential projects continued to be favoured ahead of commercial development will put further pressure on an office pipeline that already struggles to keep up with demand.”
With residential values soaring, house builders are increasingly competing with office developers for London stock. The former are prepared to pay above asking, making it more difficult for the latter to deliver new stock, as seen in April when luxury residential developer Royalton Group swooped on BBC London’s former Marylebone headquarters. It paid £75m – well above the £60m asking price.
Simon Tann, central London partner at Levy, claims a “massive tightening of debt finance” after the 2008 recession left several firms without scope to build offices. As a result, the future of West End office development lies in fewer hands than ever before. Just five parties will deliver 57% of the pipeline to 2018, says GVA. This includes players such as British Land, Land Securities and Derwent London.
The remaining 43% will be delivered by owner-occupiers, UK private companies and overseas institutions. The bulk of landlords (see below) are excited about the lettings craze coming their way.
Forecasts compiled for Estates Gazette by Colliers International predict all West End submarkets will see a double-digit rise in rents over the next four years. It will be music to the ears of the few lucky landlords that have a solid pipeline. Mayfair rents could soar from a headline £122 per sq ft last year to £145 per sq ft in 2018. During the same period rents are expected to jump by 20% in Covent Garden, to £90 per sq ft, and by 38.5% in Noho to £90 per sq ft.
Is there any chance of a slowdown? Not according to Joe Fuller, partner at niche West End agency Bluebook. Instead, he believes there may be a “slight pause” next year owing to the General Election, but this will not interfere with the new pre-construction deal trend. Fuller says: “[These types of deals] are now going to be the commonplace in the West End.”
With a host of new office requirements launched over the summer, including from Funding Circle, it has become a rumbling market where tenants will have to brace themselves against the seismic shifts of a West End earthquake by launching searches earlier than ever before.
Who will deliver in the West End?
Great Portland Estates
Office pipeline includes: 75,000 sq ft at
St Lawrence House, W1 by 2016; 217,000 sq ft at Rathbone Place, W1. Great Portland Estates chief executive Toby Courtauld says: “There is a good possibility that we will let a good proportion of our pipeline ahead of completion.”
Derwent London
Office pipeline includes: 90,000 sq ft at 1-2 Stephen Street, W1, for completion by the end of 2014; 240,000 sq ft at North Wharf Road, W2, for 2018; 335,000 sq ft at 80 Charlotte Street, W1, for 2018. Derwent chief executive John Burns says: “Occupiers that have stood still for a while are now taking space.”
The Crown Estate
Office pipeline includes: 80,000 sq ft (with Exemplar Properties) at 1 New Burlington Place, W1, in 2015; 210,000 sq ft redevelopment (with Oxford Properties) of St James’s market, SW1, in 2016. James Cooksey, head of the St James’s portfolio, says: “We are seeing more pre-completion lettings than before.”
Who will deliver in the West End and why: Almacantar
Almacantar’s office pipeline includes 123,000 sq ft of offices at Marble Arch by 2018. Plans are mooted for new office space at 125 Shaftesbury Avenue and CAA House.
Kathrin Hersel, development director at Almacantar, comments: “The strong demand we are seeing is being driven by an improving business confidence. Until a year ago headlines have been around a double or even triple-dip recession but the economy is now growing at its fastest pace since 2007 and is back to pre-recession levels. The occupational markets benefit from employment growth and improving consumer and business confidence, which has pushed leasing activity beyond the 10-year trend.”
joanna.bourke@estatesgazette.com
