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The continual rise of office rents in London

publication date: Aug 22, 2007
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author/source: Ian Lerner
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londonBasically my view is that London office rents have taken a totally different direction in the past 18 months. We have seen rents rise in the City to more than double that they were at the beginning of 2006 when new buildings such as the “Gherkin” could be acquired at rents of around £35 per sq ft. Now that space would probably cost you between £70/80 per sq ft if it was available. However by far the biggest leap in rents has been the West End where rents are now being quoted at circa £120/130 sq ft. Whether these rents are being driven purely by Hedge funds’ quests for offices, or there are other factors, has yet to be recognised.

One interesting factor that has now emerged is that traditionally West End office rents were always around 10/15% less then prime City rents, but we now see a situation where they are substantially above City levels and the question is whether these rents will “catch up” or whether the differential is long term. Indeed, will we now will see a situation where companies will move from the West End to the City because it is cheaper? There is likely to be a greater supply of new offices in the City as there are more developments taking place there over the next few years - which is not the case in the West End and particularly as West End residential values are talked at being at levels well in the excess of £2,000 per sq ft which exceeds the capital value of offices.

Why would you want to develop offices when residential is worth more?

Alongside this whole aspect of City and West End rents is the other factor which is the “ripple effect” that then occurs in the surrounding areas. Again, traditionally Holborn (mid town) rents have been 25% less than prime City and West End for equivalent accommodation. The City and West End “fringe areas” ie, Smithfield, Southwark, Hammersmith and Waterloo etc. have seen 50% discounts to equivalent space in the prime areas. It is likely that rents in these areas are going to rise dramatically.

The one sobering thought is that the office market has always been volatile and the very broad brush synopsis is 5 years up 5 years down! If that cycle continues the question is on past performance, will the bubble burst in 2010 or will it carry on beyond the 2012 Olympics period?

Brian Saidman of James Lewis and Company agrees:

Our Practice has been established in central London for more than 35 years dealing with commercial properties in the Fitzrovia, Soho, Bloomsbury and Marylebone areas. During this period we (and our clients) have been significantly affected by the various financial cycles in the office letting market.

The most recent, and now clearly identifiable cycle, produced a zenith of central London rental values peaking in early 2000 having risen slowly from the depths of 1995, followed by a slow but rapidly accelerating decline from the 2nd quarter of 2000 through to the absolute nadir of the market in mid-late 2005.

It had been thought that the events of 9/11 (2001) had been a major factor in the rapid decline of the office letting market as well as the ‘dot.com’ bubble bursting, but later analysis demonstrates that rents had been heading south well before that date. At one point the office letting market had virtually ceased to exist in central London.

Through 2006 the demand for offices (particularly new build) began to rise and gradually all sectors of the central London Office market (over 60% of which is B+ and lesser grades of offices - some of which had been pronounced “redundant and permanently unlettable”) showed heightened activity with this activity pulling rents off the bottom and beginning to accelerate quite sharply.

From our own letting experience and published articles, it can be seen that prime West End is now reaching dizzy heights (mainly it would appear driven by hedge funds!) in excess of £100 per sq.ft., well exceeding the 2000 zenith, with a more general marketing now heading for, and probably shortly exceeding, all previous levels as well. As an instance,Tottenham Court Road, good quality B/B+ space, has moved from £25 per sq.ft to £39.50 per sq.ft in a matter of 12 months.