City offices activity expected to rise later this year – DTZ
DTZ’s latest research into the market for office space in Central London has found that the West End offices market was the strongest during the first quarter, with occupiers in the retail sector boosting activity, while leasing activity in the market for City office space remained subdued. But DTZ expects to see a reversal of these trends later in the year, as the level of floorspace under offer in the City has risen sharply – and now accounts for 63% of the Central London total – while the amount under offer in the West End has declined following recent strong leasing activity.
Overall take-up of offices in Central London fell 17% in Q1 to 2.2m sq ft, which is well below the 10-year quarterly average of 3.1m sq ft, DTZ notes. The figure for the final quarter of 2011 was 2.6m sq ft. DTZ expects take-up to remain below trend in the short term as occupiers remain cautious, but it feels that the mid-term outlook is more positive. Active requirements remain above trend, DTZ notes. It forecasts that take-up will recover to 2011 levels towards the end of this year and will increase further in 2013.
The availability of office space in Central London continued to rise during Q1 to 14.3m sq ft, or 6.1% of stock. This compares with the recent low of 13.3m sq ft seen in the third quarter of 2011. Supply of secondary space has risen and the level of satisfied demand is low, the firm notes. Pre-leasing activity has been triggered in the West End by the shortages of prime office space in certain areas.
Rents for prime offices have remained unchanged in most Central London markets during Q1, except for offices in Southwark, where they rose to £45 per sq ft from £42.50 per sq ft. DTZ notes that prime rents for City office space have not risen for 12 months now as a result of weak occupier activity levels, and it does not expect them to rise until the end of 2012. It forecasts that prime City rents will reach £59.50 per sq ft in 2013 with incentives falling to 18 months rent-free on an assumed 10-year term. In the longer term DTZ expects a supply imbalance to boost rental levels further and sees prime rents for City offices reaching £67 per sq ft before the end of 2015.
In the West End, DTZ expects a modest increase in prime rents to £97.50 per sq ft from the current £95 per sq ft before the end of this year, thanks to a shortage of Grade A space in the Mayfair and St James’s areas. It then expects prime rents for West End office space to reach £100 per sq ft in 2013 and £125 per sq ft by 2016.
Supply constraints are also expected to boost rental growth for prime Mid-town office space, with the current £55 per sq ft forecast to rise to £60 per sq ft in 2013 and to £67 per sq ft by 2016.
The investment market for offices in Central London was strong during the first quarter, with transactions totalling £3.3bn recorded – more than 50% above the £2.1bn seen in Q4 2011 and the highest quarterly total since Q4 2010, DTZ points out.
