The continuing economic difficulties of 2012 can herald an expectation amongst London office occupiers that a need for new offices will be met by a never ending list of available properties and landlords doing somersaults to attract their interest! The real situation is a little different.
Let’s start with a few stats. Take up (aka “demand”) in the first six months of 2012 in the City of London stood at just over 2 million sq ft. That is 25% more than take up a year ago but on the other hand, it is still 11% down on the longer term average.
So what that means is that for the “willing” occupier (i.e. with no existing premises to get rid of) a warm welcome awaits from landlords. The basket of inducements can include “dealing” rents much lower than quoting levels, inducement packages (offering two months rent free for each year of occupation) and/or lease flexibility to break in say three or five years. For companies boasting a strong balance sheet, some landlords will offer to fund fit-out costs with minimal requirements for security deposits. The City also continues to offer the lowest Central London outgoings as compared with West End and Midtown equivalents.
We have seen several footloose occupiers contributing to significant levels of leasing activity. Headline transactions are likely to include the 200,000 sq ft plus letting to Jardine Lloyd Thompson at St Botolphs, EC3 and A J Gallagher’s c. 60,000 sq ft transaction at The Walbrook, EC4. Star attraction is proving to be Land Securities’/Canary Wharf Group’s 20 Fenchurch Street (aka “The Walkie Talkie”) with committed pre-lettings to Markel (70,000 sq ft) insurer Kiln (80,000 sq ft) and a further 25,000 sq ft firmly under offer. A notable trend of 2012 is the willingness amongst larger occupiers to look at pre-letting options whereby they commit some 2-3 years ahead of a lease expiry.
However it is not all roses! Many occupiers are not able to capitalise on the opportunities as they are tied into lease obligations with little or no chance of surrendering. The option is to re-let unwanted accommodation and become an "accidental landlord" but this path requires the offer of similar inducements in order to attract new tenants. To add pain, the Government’s change of policy on “rates relief” for unused or empty property has doubled the holding cost. The other reality is that moving property ties up invaluable capital (in this credit crunched world) and exit liabilities (e.g. dilapidations) are “cash out costs” that narrow and can often reverse the benefit of even the most generous leasing inducement from a landlord.
All is not lost however. Over the past ten years many UK companies have moved to shorter term leases or have break options. Many landlords faced with the fear of having an empty property will offer rent free periods and renegotiated lease terms in order extend the stay of their existing tenants. However many occupiers fail to appreciate this opportunity and the strength of their negotiating position; or simply leave it too late to start the discussion. For companies occupying less than c. 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 a landlord. Larger companies generally require a longer lead-in time and we recommend planning up to 18 months ahead.So our advice is that occupiers should take an active look at their lease, break options and opportunities to move and/or re-structure leases. They should seek to exploit the opportunities presented by the current market …. where they are willing and able to do so.If you would like to discuss your company’s property situation, please contact David Alcock or Jon Beilin at Newton Perkins.