London office rents set to continue rising – Savills
The supply side is reacting faster than expected to the shortage of Grade A office space in Central London, says Savills – but the firm still expects an undersupply to continue to support rising office rents during 2012-2017. While take-up of Central London offices was subdued during the first half of this year, Savills expects demand to recover to average levels as overall employment in London rises.
Take-up of West End offices in Q2 was just 681,025 sq ft, but a stronger first quarter boosted H1 take-up to 1.6m sq ft, which is only 2% below the long-term average H1 take-up figure and 5% lower than the H1 2011 total. There has been unusually high demand from retailers for office space in the West End, Savills notes, while 45% of all requirements are from the TMT sector. The firm points out that this is because 11 of the 20 requirements over 100,000 sq ft are from this sector, and also notes that 25% of TMT requirements are ‘potential’ rather than ‘active’.
Supply rose 7.5% in June as 300,000 sq ft entered the market – a mixture of developments and refurbishments – but the vacancy rate remains low at 4.5%, Savills notes. Grade A space now accounts for 62% of all supply. Savills says development activity next year will return to average levels for the first time since 2008, minimising any strong average prime rental growth.
Average prime rents fell 5% in Q2 to £74.90 per sq ft despite a top rent of £110 per sq ft achieved in May at 23 Savile Row. The firm expects average prime rents to rise by 1.3% over the whole of 2012 and to grow by 5% over the next five years.
In the first half of 2012, take-up of City offices reached 2.1m sq ft, up 31% year-on-year but 11% below the long-term average, Savills notes. Early July supply was around 7.3m sq ft, giving a vacancy rate of 9%. Several completions are due in the next few months, so the vacancy rate is unlikely to drop below that level, the firm adds.
The amount of City office space under offer towards the beginning of July was 1.4m sq ft, with more than 400,000 of this at new developments or refurbishments. Savills says this is around 18% above the long-term average.
The average prime rent for offices in the City so far this year is £60.00 per sq ft, which is level with 2011 and 7% above the 2010 figure. The top rent achieved so far in 2012 is £70.00 per sq ft at the Heron Tower.
In the Docklands, office space totalling 292,588 sq ft was taken up – well below the long-term average but a huge improvement on the H1 2011 figure, when only 100,000 sq ft was leased, Savills notes. The firm points out that the amount of space leased by LOCOG in the Docklands totals more than 300,000 sq ft, all of which it assumes will be coming back onto the market in late 2012 and early 2013. The amount of vacant office space in the Docklands has risen to 1.6m sq ft from 1.3m sq ft during the past six months, it adds.
The current tone for prime Docklands office rents remains in the £40-£45 per sq ft range, Savills estimates. The highest rent achieved in H1 2012 was £43 per sq ft to Met Life on the 34th floor of 1 Canada Square. Savills says the big challenge for the Docklands offices market is on the supply side in the short to medium term. As well as the large amount of space occupied by LOCOG, it notes market expectations that Clifford Chance will market around 400,000 sq ft at its 10 Upper Bank Street headquarters. “At current rates of take-up, or even annual average rates, this will take some time to be absorbed and will limit the prospects for short term rental growth,” the firm says.
