London office rents to rise as new supply set to fall – DTZ
DTZ’s latest research on the market for available office space in Central London in Q1 2011 notes that the fall in take-up of newly built floorspace was sharpest, declining 40%, whereas the drop in take-up of second-hand office space was just 5% compared with the final quarter of 2010. DTZ says that if pre-lets are stripped out, the fall in take-up is not so acute, at 30% compared with Q4 2010. Despite the reduced take-up, availability continued to decline in Q1 2011, dipping 4% over the quarter.
As CBRE also found in its research on this market, DTZ says development starts were high during Q1 2011, at 2.3m sq ft in total – the highest since Q4 2006. However, given the expected sharp drop in the tempo of new supply from now on and during the next 12 months, DTZ expects the demand-supply balance to continue to support rental growth into 2012.
Availability in the City rose to 7.2m sq ft in Q1, DTZ says, or 8.1% of stock. Newly built supply increased by 14% to 3.9m sq ft, largely driven by the 390,000 sq ft at Cannon Place, EC4, which is scheduled to complete in Q3. Take-up totalled 1.3m sq ft in Q1, 15 % below the 1.5m sq ft in Q4 (including the 500,000 sq ft prelet to Bloomberg), but in line with the long-term average, DTZ notes. It adds that financial and non-legal professional occupiers accounted for 70% of the Q1 total. DTZ expects prime headline rents in the City to rise to £60 per sq ft by year-end, and to maintain the current growth rate until 2014. “Incentives are forecast to harden to 18 months rent-free on a 10-year term by the end of 2011, and continue to decline thereafter,” it adds.
In the West End, availability continued to decline in Q1, with supply falling to 2.8m sq ft and the Grade A availability ratio reaching just 1.2%. Take-up rose 16% to 590,000 sq ft compared with 508,000 sq ft in Q4. “This still falls well short of the
long term average (800,000 sq ft), however,” DTZ points out. Grade A take-up rose 13% to 155,000 sq ft, which was again below the long-term average of 255,000 sq ft. DTZ expects the intensifying shortage of prime stock to accelerate growth in prime rents to £95 per sq ft by the year-end, and forecasts that they will continue to rise at a slower rate after that, to reach £115 per sq ft in 2015. “Incentives are forecast to harden to 15 months by the end of the year and fall to nine months by 2014,” it adds.
Mid Town experienced strong occupier demand in Q1, particularly from media and non-legal professional occupiers, which DTZ says looks set to continue. Prime headline rents reached £55 per sq ft, up from £53.50 per sq ft at the end of 2010, and incentives remained at 18 months rent-free on a 10-year lease, it notes. DTZ expects rents to rise to £57.50 per sq ft by the end of 2011, and to reach £65 per sq ft in 2014. It forecasts that incentives will move in to 15 months on a 10-year term
by the end of 2011 and to nine months by 2013.
