In this 2015 update Newton Perkins partner, Jon Beilin, looks at the current City office market and assesses whether occupiers can still negotiate great deals (with Newton Perkins help!).
“Let’s start by looking at what has been happening in the market.
2014 saw the highest amount of take-up ever recorded! Total City take-up reached 8.2 million sq ft. This is 16% up on 2013 and 78% up on take-up for 2012, underscoring a major return in confidence amongst London occupiers in the light of an improved regional economy.
The TMT (Technology Media and Telecommunications) sector once again accounted for an above average share of occupier activity with 23% of annual take-up. This compares with a long term average of around 11%, although skewed by large lettings to Amazon (445,000 sq ft) and Omnicom (374,000 sq ft). The 23% market share taken by banking and finance was the highest since 2010 though still some way short of the annual average of 30%. The service sector accounted for 26% of take-up with legal firms particularly active.
We are therefore now seeing a notably more limited amount of current supply. Furthermore, there is only 2.3 million sq ft due to be delivered in 2015 of which 52% is already pre-let leaving just 1.1 million sq ft of speculative accommodation coming on line. This will result in downward movement in the City vacancy rate, while upward pressure on rents will continue. Forecasted prime rents for mid-2015 are between £65.00-£68.50 per sq ft but we are seeing instances of rents in to the £70.00 per sq ft bracket and indeed £80.00 per sq ft for top floors of the best-known buildings.
The market has clearly moved on. What does this mean for occupiers?
The “willing” occupier (i.e. with no existing premises to get rid of) can still expect “dealing” rents a little lower than quoting levels with inducement packages offering around 1.5 months rent free for each year of occupation. Lease flexibility to break after say 5 years is still available for smaller lettings but in lettings of greater than 10,000 sq ft, landlords are increasingly holding out for leases without break options.
The City also continues to offer the lowest Central London outgoings as compared with the West End and Mid-town equivalents. However, one time “ugly sister” pitches such as Old Street, Aldgate and the South Bank have largely transformed into vibrant mixed use locations and no longer offer the opportunity for cheap rents. Indeed, the likes of Resolution’s Alpha Beta scheme on Finsbury Square (marketed as “South Shoreditch”!) have achieved rents in the mid-£60’s per sq ft to embarrass all but the most prime Central City locations.
A further notable trend amongst larger occupiers is a willingness to look at pre-letting opportunities whereby they commit some 2-3 years ahead of a lease expiry.
Another change is a greater likelihood of landlords accepting surrenders which may assist occupiers in their moving aspirations. This would not have been considered by landlords say 2 to 3 years ago when the re-letting scenario was fraught with too much uncertainty and holding cost.
However, some occupiers have still to appreciate the change in market conditions or simply leave it too late to start their re-location. For companies seeking less than 10,000 sq ft, a 12 month head start is usually needed before a lease expiry or break option in order for constructive discussion to take place with the landlord. Larger companies generally require a longer lead-in time and we recommend planning up to 18 months ahead.
So our advice to occupiers is still to take an active look at their lease, break options and opportunities to move and/or restructure leases. They should seek to exploit the opportunities presented by the current market… where they are willing and able to do so.”