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RESEARCH
LONDON OFFICE MARKET
Q1 2016
Guide to rents and rent
free periods
carterjonas.co.uk 1
LONDON OFFICE LOCATIONS
N1
NW1
WC1
W1
W11
WC2
W2
W8
W6
W14
EC1
EC2
EC4
E1
E14
SE1
SW7
SW3
SW1
GRADES OF OFFICE ACCOMMODATION
For marketing purposes office accommodation is generally
categorised into Grades which are defined as follows:Grade A - new or newly refurbished office space where the building
specification includes suspended ceilings and fully accessible raised
floors for data/telecoms cable management, passenger lift and air
conditioning facilities.
Grade B - office space that may only incorporate under floor or
perimeter trunking for data/telecoms cable management, rather than
fully accessible raised floors, and/or air cooling facilities, instead of an
air conditioning system that dehumidifies, filters and draws fresh air
into the building. Grade B space also tends to be of a generally lower
quality building specification.
“Refitted” - office space that is ‘as new’, having been completely
refitted throughout, to include new fixtures and fittings to the
common parts and reception area, new building services – including
air conditioning and passenger lift facilities, electrical, plumbing
and lighting systems, and new raised floors, suspended ceilings and
sanitary ware. The specification of works will comply with the latest
health and safety legislation and may also include re-cladding the
exterior of the building.
“Refurbished” space is defined as office accommodation where
the landlord has redecorated and recarpeted the available office
space (but not necessarily the common parts) and overhauled, but
not renewed, the building services, such as the air conditioning and
passenger lift facilities.
2
EC3
WEST END
Paddington/Kensington/Chelsea
Victoria/Westminster
Mayfair/St James’s
Soho/North of Oxford Street
Euston/King’s Cross (West)
MIDTOWN
Strand/Covent Garden
Bloomsbury
Holborn/Fleet Street
King’s Cross (East)
CITY/CITY FRINGE
City Core
City Fringe (East)
City Fringe (North)
SOUTH BANK
L
ondon Bridge/
Southwark/Waterloo
DOCKLANDS
Canary Wharf
Rest of Docklands
WEST LONDON
ammersmith/Olympia/
H
West Kensington
OFFICE
MARKET
OVERVIEW
The supply pipeline of new office space under
construction is gradually recovering, although the
development process is unlikely to relieve the upward
pressure on rents until Q4 2017 at the earliest, when
the current wave
of new developments will start to
reach completion.
In the meantime, tenants with rent reviews or lease
expiries due in the next 18-24 months are faced with
accepting an unwelcome uplift in their rental costs,
or introducing hot desking and agile working policies
to reduce their property footprint. The alternative is a
costly and disruptive relocation to a lower cost area,
which may result in the loss of key staff.
Carter Jonas’ latest analysis of Central London office
rent, business rates and service charge overheads
shows that the cost of occupying new or refitted
Grade A office space is up to £104.50 per sq ft per
annum cheaper in the City core (EC3) and £117.50 per
sq ft and £118.75 per sq ft lower in the City fringe and
South Bank sub-markets respectively, compared with
prime located space of equivalent specification in the
West End (see Table 3).
These statistics explain the eastward and southward
migration of some West End tenants over the last few
years to the City, City Fringe and South Bank. However,
increased demand has translated into falling vacancy
levels, higher rents and a narrowing of rent free
periods in these, hitherto, lower cost areas, which is
reducing their attractiveness. Only peripheral locations
such as Stratford and Docklands are now able to offer
refurbished air conditioned space at rents
below £40.00 per psf pa, although this figure does not
take into account business rates or service charges.
All the sub-markets that form the Central London
office market are suffering from an unprecedented
under-supply of vacant floor space and a
narrowing of rent free periods.
This is resulting in limited choice for those tenants
that wish to relocate and a weaker bargaining
position for those facing rent reviews and lease
renewals. The root cause of this phenomenon
can be traced back to the 2008-09 international
banking and sovereign debt crises which resulted
in a development funding drought and collapse
in demand. The restoration of economic growth
and the consequent resumption of job creation
– particularly in the technology, media, creative
and, more latterly, financial services sectors – has
translated into a sustained increase in demand for
office space, particularly in the City of London and
City fringe areas.
The West End, Midtown and South Bank office
markets have suffered most from supply side
constraints. This has been exacerbated by
planning policies, aimed at alleviating the London
housing shortage, that have encouraged landlords
to redevelop office buildings for higher value
residential use.
Overleaf is an update by our Tenant Advisory and
Research Teams which provides a summary of the
activity in each of the London office sub markets.
“LOW VACANCY LEVELS CONTINUE
TO UNDERPIN RENT INCREASES
AND A NARROWING OF RENT FREE
PERIODS ACROSS THE CENTRAL
LONDON OFFICE MARKET. THIS IS A
TREND THAT IS LIKELY TO CONTINUE
UNTIL THE CURRENT WAVE OF
OFFICE DEVELOPMENTS UNDER
CONSTRUCTION REACH COMPLETION
DURING THE NEXT 18-24 MONTHS.”
Michael Pain; Head of Carter Jonas Tenant
Advisory Team
carterjonas.co.uk 3
KEY
HIGHLIGHTS
CENTRAL LONDON SUB-MARKETS
WHICH HAVE SEEN CONSIDERABLE
ACTIVITY IN THE LAST QUARTER ARE
HIGHLIGHTED BELOW:
THE CITY OF LONDON
Rents for mid-rise new and refitted Grade
A space in the City core have increased
by over 14% since Q1 2015. It is, however,
secondary City locations such as St
Paul’s, Old Bailey and Blackfriars where
rental growth has been highest – up to
25% over the same period, fuelled by
the convergence of those relocating
from the City core and the West End
with the common aim of securing better
value premises.
THE CITY FRINGE
Quoting rents for new and refitted space
in the Old Street area have reached the
mid £60’s per sq ft pa and the early £70’s
per sq ft pa for the upper floors of high
rise buildings. Tenants seeking better
4
value office space are therefore focusing
their searches in the east City fringe, in
areas such as Aldgate, Spitalfields and
Tower Hill and at Stratford and Docklands.
Landmark rents have recently been
agreed at Aldgate Tower, where
engineering design firm Aecom, has taken
circa 100,000 sq ft. The development has
achieved rents of over £60 per sq ft on
the upper floors and mid £50’s per sq ft
on the lower floors.
The recent letting of the top three floors
of the Steward Building to Cognolink,
comprising 17,896 sq ft, has set a
benchmark rent for Spitalfields of £70.00
per sq ft. The east City fringe has also just
witnessed one of the largest pre-lets in
Central London – the pre-letting of the
entire London Fruit and Wool Exchange
at Spitalfields, comprising 275,000 sq ft,
to Ashurst Solicitors.
THE SOUTH BANK
In Q1 2016 the Shard continues to
dominate the South Bank skyline and
office rentals market – a rent of over
£90.00 per sq ft pa having recently been
achieved on Level 26 (15,912 sq ft) to
Leonteq. We have also seen an increase
in occupiers viewing the South Bank as
a low cost alternative to the West End.
Those moving into the area include
Boodle Hatfield from Mayfair, W1 to
23,600 sq ft at 240 Blackfriars Road and
Howard Kennedy from Marylebone, W1 to
54,500 sq ft at 2 London Bridge.
VICTORIA
Victoria has witnessed one of the
largest lettings in the West End since
Q1 2015 with Deutsche Bank taking
92,000 sq ft at Land Securities’ Zig
Zag Building at Victoria Street, where
a record rent of over £90.00 per sq ft
per annum has reportedly been agreed
on the upper floors. This letting is a rare
example of a business relocating from
the City to higher cost West End office
accommodation - in order to be nearer
their private client customer base.
PADDINGTON
Paddington has recently seen new rent
benchmarks being set at Land Securities’
20 Eastbourne Terrace where rents of
between £70.00 and £72.50 per sq ft per
annum are reportedly being agreed on
lettings of the upper floors. Confidence
in the area has continued to grow in the
run up to the opening of the Elizabeth
Line in 2018, which will significantly
improve connectivity. Great Western
Developments has announced plans for
a 65 storey mixed use tower building at
31 London Street which will incorporate
circa 150,000 sq ft of offices, raising the
profile of Paddington if planning consent
is granted later this year.
KING’S CROSS
Rental growth within the area has
prompted the developer of King’s Cross
Central to proceed with the speculative
development of Building R7, comprising
155,000 sq ft, construction of which is
scheduled to complete in mid-2017. It
has been reported that terms have been
agreed to pre-let the entire building.
THE LONDON OFFICE
MARKET IN NUMBERS...
City core rent, rates and service
charge occupancy costs are typically
£93.00 - £113.25 psf pa compared
with £164.25 - £217.75 per sq ft for
prime West End space
City core office rents are £65.00 £77.50 psf pa for prime located Grade
A space and £85.00 - £93.50 psf pa
for the upper floors of tower buildings
West End office rents for new and
refitted prime located space in
Mayfair and St James’s are now £110 £150 per sq ft pa and £72.50 - £90.00
per sq ft pa for space in areas such as
Victoria and Fitzrovia
Only two sub-markets now offer
refurbished Grade A space at rents
below £40.00 psf pa – Docklands
and Stratford
Rent free periods for 5 year leases –
up to 10 months (City core) and up to
8 months (West End prime)
By Q1 2018, average rents for prime
located, mid-rise, Grade A City and
West End office space are expected
to reach £80.00 per sq ft and £150.00
psf respectively and £76.00 psf and
£72.50 psf in the Midtown and South
Bank markets
FOR MORE INFORMATION ON
MARKET TRENDS PLEASE TURN
TO OUR GUIDE TO THE CENTRAL
LONDON OFFICE SUB-MARKETS
ON PAGE 14.
carterjonas.co.uk 5
IN NUMBERS, Q1 2016
OFFICE RENTS
Table 1 provides a geographical summary
of typical landlord quoting office rents in
each of the Central London office submarkets as at Q1 2016, assuming that
leases for a minimum period of 5 years
are to be granted. The upper floors (UF)
of tower buildings tend to command
rental premiums, typically of 20 – 30%,
compared with the rents for lower floors,
and are shown in brackets.
Since Q1 2015 quoting rents have typically
increased by £5.00 - £10.00 per sq ft per
annum, albiet it is possible to negotiate
rent discounts up to 3%.
6
The geographical variation in rents is
reflective of:
• T
he different supply and demand
dynamics of each sub-market
• T
he age, quality and specification of
the available office space
• Proximity to public transport
Small office suites of less than 3,000
sq ft tend to command higher pro-rata
rents – usually £1.50 - £3.00 psf pa above
those set out in Table 1 – and have been
excluded to prevent distortion in the data.
Table 1
London Office Market – Typical Landlord Quoting Rents – Q1 2016 (Space over 5,000 sq ft)
Location
Typical Quoting Rent per sq ft per annum
Grade A
City of London – Pt EC1, Pt EC2, Pt EC3 & Pt EC4
Grade B
New / Refitted
Refurbished
Refurbished
City of London - Prime locations e.g. Gracechurch Street, Lime Street / Fenchurch Street,
Old Broad Street
£65.00 - £77.50
(UF = £85.00 - £93.50)
£52.50 - £62.50
(UF = £65.00 £75.00)
£42.50 - £50.00
City of London - Secondary locations e.g. Blackfriars, Old Bailey, Barbican, Liverpool
Street, Aldgate
£60.00 - £75.00
(UF = £77.50 - £82.50)
£47.50 - £57.50
(UF = £60.00 £67.50)
£40.00 - £45.00
City Fringe North / North West – Farringdon, Clerkenwell, EC1,
Finsbury Square & Shoreditch, EC2
£62.50 – £72.50
£48.50 – £60.00
£37.50 - £47.50
City Fringe East - Spitalfields, Aldgate East, E1 & Tower Hill, EC3
£55.00 - £69.50
£42.50 - £52.50
£32.50 - £40.00
£57.50 - £67.50
(UF = £75.00 - £92.50)
£47.50 - £55.00
£40.00 - £47.50
Docklands - Prime locations e.g. Canary Wharf / Heron Quays
£42.50 - £50.00
£38.50 - £42.50
£25.00 - £32.50
Docklands - Secondary locations e.g. South Quay, Limeharbour
£32.50 - £37.50
£25.00 - £31.50
£19.50 - £23.50
Stratford
£42.50 - £47.50
£27.50 - £37.50
£17.50 - £22.50
Bloomsbury
£60.00 - £75.00
£47.50 - £57.50
£40.00 - £48.50
Holborn
£60.00 - £72.50
£52.50 - £59.50
£40.00 - £49.00
City of London Fringe – Pt EC1, Pt EC2, Pt EC3 & E1
“South Bank” - SE1
Waterloo / Southwark / London Bridge
Docklands - E14 & Stratford – E15 & E20
“Midtown” - WC1, WC2, NW1, Pt EC1 & Pt EC4
Covent Garden / Strand (west) / Charing Cross
£72.50 - £85.00
£57.50 - £67.50
£45.00 - £52.50
£65.00 - £75.00
(UF = £82.50 - £92.50)
£50.00 - £59.50
£40.00 - £45.00
Kingsway / Strand (east) / Aldwych / Fleet Street
£59.50 - £70.00
£47.50 - £55.00
£40.00 - £45.00
King’s Cross / St Pancras
£65.00 - £80.00
£52.50 - £65.00
£37.50 - £45.00
Mayfair / St James’s - Prime locations e.g. Berkeley Square, St James’s Square
£110.00 - £150.00
£87.50 - £110.00
£67.50 - £77.50
Mayfair / St James’s - Secondary locations e.g. Albemarle Street, Jermyn Street
£92.50 - £107.50
£75.00 - £87.50
£60.00 - £70.00
North of Oxford Street (west) - Prime locations e.g. Portman Square, Cavendish Square
£79.50 - £92.50
£65.00 - £75.00
£47.50 - £57.50
Shaftesbury Avenue / St Martin’s Lane
West End - W1, W2 & SW1
North of Oxford Street (west) - Secondary locations e.g. Seymour Street, George Street
£70.00 - £80.00
£55.00 - £65.00
£42.50 - £50.00
North of Oxford Street (east) - “Fitzrovia” / Great Portland Street
£72.50 - £90.00
£57.50 - £67.50
£47.50 - £55.00
Soho, Regent Street
£75.00 - £90.00
£60.00 - £70.00
£47.50 - £57.50
Haymarket, Lower Regent Street
£65.00 - £75.00
£52.50 - £62.50
£42.50 - £47.50
£72.50 - £80.00
(UF = £85.00 - £90.00)
£57.50 - £70.00
£45.00 - £55.00
Millbank, Pimlico
£62.50 - £67.50
£47.50 – £57.50
£40.00 - £48.50
Knightsbridge
£82.50 - £97.50
£70.00 - £77.50
£47.50 - £55.00
£57.50 - £67.50
(UF = £70.00 - £72.50)
£50.00 - £57.50
£40.00 - £45.00
£65.00 - £75.00
£52.50 - £62.50
£40.00 - £47.50
Chelsea
£70.00 - £92.50
£55.00 - £65.00
£40.00 - £47.50
Kensington / Queensway / Notting Hill
£50.00 - £57.50
£40.00 - £47.50
£35.00 - £40.00
Fulham / Hammersmith / West Kensington / Olympia
£52.50 - £58.50
£42.50 - £50.00
£30.00 - £40.00
Chiswick
£48.50 - £52.50
£40.00 - £47.50
£27.50 - £35.00
Victoria, Westminster
Paddington / Bayswater
Euston
South West / West London, SW3, SW6, W4, W5, W6, W8, W11, W14
(UF = Upper Floors)
Source: Carter Jonas Research
carterjonas.co.uk 7
RENT FREE PERIODS
Since Q1 2015 rent free periods for leases of between 5 and 10 years have shortened
by 1 - 2 months throughout many parts of Central London, as a direct consequence
of supply side constraints, and are now typically as follows:
Table 2
Rent Free Periods By Sub-Market – Q1, 2016
Location
Typical Rent Free Period Agreed
(lettings over 5,000 sq ft)
5 year lease
(month)
10 year lease
(month)
City of London Prime - Old Broad Street, EC2 / insurance district, EC3
7 - 10
16 - 22
City of London Secondary - Blackfriars, EC4, Barbican, EC2, Liverpool Street, EC2, Aldgate, EC3
8 - 11
17 - 22
City Fringe North / North West – Farringdon, Clerkenwell, EC1 & Shoreditch, EC2
4-7
9 - 15
City Fringe East – Spitalfields, Aldgate East, E1 & Tower Hill EC3
8 - 11
17 - 22
“Midtown” - Holborn, WC1 / Covent Garden, WC2 / King’s Cross, N1
7-9
15 - 17
West End Prime - Mayfair, W1 / St James’s, SW1
5–8
10 - 15
West End North – Marylebone, Fitzrovia, Soho, W1
7-9
14 - 17
West End South – Westminster, Victoria, SW1
7-9
16 - 20
“South Bank” - London Bridge / Waterloo, SE1
5-8
15 - 17
West London - Hammersmith, W6, Olympia, W14
6-9
14 - 18
Docklands – Canary Wharf, E14
11 - 13
23 - 26
Source: Carter Jonas Research
8
COMPARISON OF TOTAL OFFICE COSTS – Q1 2015 VS Q1 2016
Rent, business rates and building service charge costs are the principal outgoings associated with
leasing office space in a multi-tenanted building. Table 3 provides a summary, by sub-market, of the
changes in the costs for prime located new and refitted Grade A office space since Q1 2015:
Table 3
Typical Headline Office Costs - Prime Located New & Refitted Grade A Space – Q1 2015 vs Q1 2016 (£ per sq ft p.a.)
Cost Variable
West End
2015
2016
City of London
Docklands
Midtown (North)
South Bank
City Fringe
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
Rent
102.50 - 110.00 125.00 150.00
57.50 67.50
65.00 77.50
42.50 47.50
42.50 50.00
57.50 70.00
60.00 75.00
52.50 59.50
57.50 67.50
46.50 60.00
55.00 72.50
Business Rates
44.00 50.00
45.00 55.00
18.50 22.50
18.75 23.00
14.75 16.00
15.00 16.60
23.00 27.00
23.50 28.00
16.50 18.25
16.75 18.75
12.75 17.50
13.00 18.00
9.00 12.50
9.25 12.75
9.00 12.50
9.25 12.75
12.08 15.58
12.46 15.96
9.00 12.50
9.25 12.75
9.00 12.50
9.25 12.75
9.00 12.50
9.25 12.75
93.00 113.25
69.33 79.08
69.96 82.56
89.50 109.50
92.75 115.75
78.00 90.25
83.50 99.00
68.25 90.00
77.25 103.25
Service
Charge
Total
% Increase
155.50 - 164.25 - 85.00 187.50
217.75 102.50
5.6% - 16.1%
9.4% - 10.5%
1.0% - 4.4%
3.6% - 5.7%
7.1% - 9.7%
13.2% - 14.7%
Source: Carter Jonas Research
Notes:
1.
The table summarises typical landlord quoting rents for prime located low and mid-rise new and refitted Grade A space incorporating air
conditioning and fully accessible raised floors for data / telecoms cable management, disregarding the value of rent free periods.
2.
The rents for the upper floors of tower buildings, which typically command rental premiums of circa 20 - 30%, have been excluded.
3.
Geographical definitions - the prime office locations for each Central London office sub-market set out in the in the table above comprise the
following:
4.
5.
-- West End = Mayfair, W1 & St James’s, SW1
-- City of London = Old Broad Street, EC2 & the insurance district, EC3
-- Docklands = Canary Wharf, E14
-- Midtown (north) = Holborn, WC1 / EC1 / EC4 and Bloomsbury, WC1
-- South Bank = London Bridge, SE1
-- City Fringe = Clerkenwell, EC1, Spitalfields, E1
Docklands service charge costs include the Canary Wharf estate charge, currently £3.21 per sq ft p.a.
Business rates are based on the rental value of a property and will therefore be higher in areas associated with high rents. The cost estimates
include the £0.02 per sq ft p.a. Crossrail levy.
carterjonas.co.uk 9
IN SEARCH OF BETTER VALUE OFFICE SPACE
Table 4
Comparison Of Office Costs, Q1, 2016 - Central & Greater London & Thames Valley Locations (£ per sq ft p.a.)
Location
Cost Variable
Rent
Business Rates
Service Charge
Total
West End
72.50 - 92.50
25.00 - 35.00
9.25 - 12.75
106.75 - 140.25
City
60.00 - 75.00
18.00 - 23.00
9.25 - 12.75
87.25 - 110.75
Docklands
42.50 - 50.00
15.00 - 16.60
12.46 – 15.96
69.96 - 82.56
Hammersmith
52.50 - 58.50
15.00 - 18.00
7.00 - 9.00
74.50 - 85.50
Brentford
25.00 - 27.50
6.50 - 8.50
7.50 - 9.50
39.00 - 45.50
Uxbridge
26.00 - 30.00
6.75 - 8.25
7.50 - 9.00
40.25 - 47.25
Ealing
32.50 - 37.50
7.50 - 8.00
5.50 - 7.50
45.50 - 53.00
Croydon
26.50 - 28.50
6.00 - 7.50
5.50 - 8.50
38.00 - 44.50
Watford
20.00 - 25.00
6.75 - 7.75
6.00 - 8.00
32.75 - 40.75
Slough
27.50 – 32.50
6.00 - 7.50
6.00 - 7.00
34.50 - 42.00
Maidenhead
27.50 - 32.50
8.75 - 9.75
6.00 - 8.00
42.25 - 50.25
Reading (Town Centre)
27.50 - 32.50
6.75 - 8.00
6.00 - 8.00
40.25 - 48.50
Source: Carter Jonas Research
1.
2.
10
The rent, business rates and service charge costs in the table are taken from a representative sample of
available new and re-fitted Grade A low/mid-rise properties above 5,000 sq ft
West End, City and Docklands rent, business rates and service charge costs are based on property samples
taken from the following areas:
-- West End – Victoria, Marylebone, Fitzrovia/North Oxford Street
-- City – St Paul’s, Blackfriars, Bank, Monument, Liverpool Street
-- Docklands – Canary Wharf
IN WHICH AREAS OF CENTRAL LONDON HAVE RENTS RISEN THE MOST?
The table below provides a geographical summary of the increases in London office rents since Q1 2015 for
new and refitted Grade A office space of above 5,000 sq ft, excluding the upper floors of tower buildings.
The variation in rent increases reflects the different supply and demand dynamics of each sub-market:
Table 5
Typical Changes In New / Refitted Grade A Office Quoting Rents (per sq ft p.a.) Since Q1 2015
Location
Rent Q1, 2015
Rent Q1, 2016
% Increase
City of London Prime - Old Broad Street, EC2 / Insurance District, EC3
£57.50 - £67.50
£65.00 - £77.50
13.0% – 14.8%
City of London Secondary -Blackfriars, EC4, Barbican, EC2, Liverpool Street,
EC2, Aldgate, EC3
£48.50 -£60.00
£60.00 - £75.00
23.7% - 25.0%
City Fringe North/North West - Farringdon, Clerkenwell, EC1, Finsbury Square,
EC2
£46.50 - £57.50
£62.50 - £72.50
26.1% - 34.4%
City Fringe East – Spitalfields, Aldgate East, E1 & Tower Hill, EC3
£35.00 - £60.00
£55.00 - £69.50
15.8% - 57.1%
“Midtown” – (south) Strand / Covent Garden, WC2
£62.50 - £72.50
£72.50 - £85.00
16.0% - 17.1%
“Midtown” (north) – Bloomsbury / Holborn, WC1
£57.50 - £70.00
£60.00 - £75.00
4.3% - 7.1%
West End Prime - Mayfair, W1 / St James’s, SW1
£102.50 - £125.00
£110.00 - £150.00
7.3% - 20.0%
West End Secondary – Marylebone, Fitzrovia/North Oxford Street East, W1
£65.00 - £75.00
£72.50 - £90.00
11.5% - 20.0%
“South Bank” - London Bridge / Southwark, SE1
£52.50 - £59.50
£57.50 – £67.50
9.5% - 13.4%
West London - Hammersmith, W6
£45.00 - £50.00
£52.50 - £58.50
16.7% - 17.0%
Docklands - Canary Wharf, E14
£42.50 - £47.50
£42.50 - £50.00
Up to 5.3%
Source: Carter Jonas Research
carterjonas.co.uk 11
RENTAL GROWTH PREDICTIONS
Based on an analysis of the office development completion pipeline, and predicted patterns
of office demand, the Carter Jonas Research Team has prepared a series of rental growth
predictions for prime located new and refitted low and mid-rise Grade A office space in each
of the London office sub-markets, which are summarised in Graph 1.
Graph 1:
Typical Current and Forecast Average Annual Quoting Rents For New and
Refitted Grade A Space (£ per sq ft)
£
160
Q1 2016
Q1 2017
140
Q1 2018
Rent per square foot p.a.
120
100
80
60
40
20
Q1 2017
Q1 2018
£130.00
£140.00
£150.00
West End Secondary
£82.50
£87.50
£91.50
Midtown
£67.50
£72.50
£76.00
City Prime
£71.25
£75.00
£80.00
City Fringe
£65.00
£70.00
£75.00
South Bank
£62.50
£67.50
£72.50
West London
£55.50
£57.50
£62.50
Docklands
£46.25
£48.50
£52.00
Stratford
£45.00
£48.00
£51.00
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Geographical Definitions:
West End Prime = Mayfair & St James's West End Secondary = Marylebone & Victoria
City Prime = Bank / Insurance District
West London = Hammersmith
City Fringe = Clerkenwell, Shoreditch, Spitalfields & Tower Hill
South Bank = London Bridge & Southwark
Docklands = Canary Wharf
Midtown = Holborn & Bloomsbury
THE OUTLOOK FOR TENANTS DURING 2016
The persisting imbalance between supply and demand for office space
throughout London is underpinning the shift in the balance of negotiating
power away from tenants. This is resulting in the following trends:
• L
ittle or no rent discount on landlord’s
quoting rents
• Shorter rent free periods
• L
imited or no break option linked rent
free periods
• A
n increasing reluctance by some landlords to
accept tenant only lease break options instead
of agreeing the more usual leasing structure
– a ten year lease incorporating a five year
tenant break option
• L
arger rent deposits where the financial status
of the proposed tenant is considered weak
carterjonas.co.uk 13
SUB-MARKETS
THE CITY OF LONDON
The strong levels of rental growth in
the City over the last couple of years,
historically low vacancy levels and
the increase in pre-letting activity has
encouraged a number of developers to
resume speculative office development.
Examples include:• 1 00 Bishopsgate – 962,000 sq ft of
which 250,000 sq ft has been prelet to the Royal Bank of Canada,
completion due Q4, 2018
• 8
0 Fenchurch Street, EC3 – 245,000 sq
ft, completion due Q1, 2018
• 1 Creechurch Place, EC3 – 273,000 sq
ft, completion due Q4, 2017
• 1 Angel Court, EC2 – 300,000 sq ft –
completion – Q3, 2016
• 6
0 – 70 St Mary Axe, EC3 (The Can of
Ham) – 300,000 sq ft – completion
due H2, 2018
• 5
2 – 54 Lime Street, EC3 (The Scalpel) –
386,000 sq ft – completion due Q4, 2017
14
Proposed landmark City tower
developments include:• 2
2 Bishopsgate, EC2 – to be built on
the site of The Pinnacle, construction
of which ceased in 2012 – planning
consent has recently been granted for
the 1.3 million sq ft, 62 storey building
• 1 Undershaft, EC3 – proposed 73 storey
960,000 sq ft tower which would
replace the existing Aviva Tower and
would be the tallest Central London
office building – planning consent yet
to be obtained
Office space of sub 5,000 sq ft is in
particularly short supply which is forcing
many tenants to consider alternative
locations including, for example, the north
and east City fringes, South Bank and
Docklands sub-markets. Some City office
tenants are finding themselves competing
against West End and Midtown office
occupiers that are similarly combing the
City fringe and Docklands office markets
for space that offers lower rental and
business rates overheads.
THE CITY FRINGE
DOCKLANDS
The promotion of the area around Old Street
roundabout, rebranded “Silicon Roundabout”,
as a hub for start-up technology companies
has been reinforced by the likes of Google
setting up co-working / incubator centres
in the area offering young companies
the opportunity to lease space on easy
in / easy out short term leases / desk
sharing agreements. These agreements are
specifically intended to encourage interaction
between businesses and individuals and the
sharing of ideas. Boutique investment funds
specialising in the tech sector are also setting
up offices in the area in order to be closer to
their client base.
The Docklands office market has been
the last of the eight London office
sub-markets to register rental growth –
reflecting historically weaker demand and
the fact that the area has not suffered
from the same supply side constraints
as all the other sub-markets. However,
Docklands still retains the distinction of
being the only sub-market where it is still
possible to negotiate rent free periods of
circa 11-14 months (five year leases) and
23-26 months (ten year leases).
Traditionally regarded as a low cost property
option for media and the creative industries
that have been priced out of areas such
as Soho and Covent Garden, the north
City fringe (Clerkenwell, Farringdon and
Shoreditch) is rapidly becoming a mature
market. Demand from technology, media
and creative businesses has, over the last
few years, fuelled the rise in office rents to a
point that has significantly reduced the cost
advantages of the area.
TRADITIONALLY REGARDED AS A LOW
COST PROPERTY OPTION FOR MEDIA
AND THE CREATIVE INDUSTRIES THAT
HAVE BEEN PRICED OUT OF AREAS
SUCH AS SOHO AND COVENT GARDEN,
THE NORTH CITY FRINGE IS RAPIDLY
BECOMING A MATURE MARKET
carterjonas.co.uk 15
The restoration of rental growth in the
Docklands sub-market has been brought
about by a number of large scale lettings
which have reduced vacancy levels. There
has also been an increase in lettings
in the Docklands sub-market to nontraditional Docklands office occupiers
including, for example, media companies
and regulatory bodies that have migrated
from the West End, Midtown and South
Bank sub-markets in search of Grade A
office space.
Once operational in late 2018, The
Elizabeth Line is likely to reinforce
the trend for West End and Midtown
occupiers to migrate to Docklands – the
new transport link will provide direct
access to Canary Wharf from Bond Street
(13 minutes) and Tottenham Court Road
(12 minutes) – roughly the same amount
of time that it currently takes to travel by
tube from Bond Street to Bank.
Recognising that Docklands is no longer
VICTORIA HAS BECOME A POPULAR
LOCATION FOR THE UK OFFICES OF
INTERNATIONAL LUXURY BRANDS
just the preserve of global banking,
financial and legal services companies,
the Canary Wharf Group has obtained
planning consent for its New Phase
development which has been designed
specifically to attract a different type of
occupier to the Docklands area, including
businesses from the creative, media and
technology sectors. Phase one of the
construction programme is scheduled to
complete in mid-2019.
THE SOUTH BANK
The Shard has attracted a varied range of
occupiers from the educational, medical
and business sectors, many of which
represent new entrants to the South Bank
office market which is seen by some
occupiers, particularly those based in
the West End, as a credible lower cost
alternative.
Under-supply is the overriding theme of
the South Bank office market as sites with
river frontages that were previously in
commercial use have been redeveloped
for higher value residential and hotel
uses. Waterloo, in particular is starved of
much needed new office development
although the proposed redevelopment
of Elizabeth House at York Road and
16
the redevelopment of the nearby Shell
Centre should address this issue. However,
it is likely to be several years before
space will be available to occupy at either
development.
MAYFAIR AND ST JAMES’S
Recent lettings of new, prime located,
Grade A space in Mayfair and St James’s
have set benchmark rents of over £150.00
per sq ft per annum, making London one
of the most expensive office locations
in the world, alongside Hong Kong and
Moscow. While the lettings of ‘super
prime’ properties are not necessarily
representative of the wider West End
office market they do, however, illustrate
an increasing trend in significantly above
inflation rent increases, underpinned by
falling vacancy levels and limited choice
which has been exacerbated by the loss of
office floor space to residential conversion.
It is no coincidence that limited availability
and the record rents associated with new
Grade A office space in prime West End
office locations is continuing to fuel the
migration of tenants to the South Bank
and eastward to the City and City fringe
– examples include Arma Partners’ move
from Mayfair to The Shard, Rathbone
Investment Management’s relocation from
1 Curzon Street to 8 Finsbury Circus, EC2
and Cognolink’s move from Whitfield
Street, W1 to The Steward Building,
Spitalfields, E1.
VICTORIA
The new office developments currently
under construction in Victoria,
including Land Securities’ mixed use
office, residential and restaurant Nova
development, and Tishman Speyer’s
Verde building are, by virtue of their scale,
transforming the built environment and
turning Victoria into a vibrant area in which
to live, work and shop.
The regeneration of Victoria is, however,
displacing rent sensitive tenants that
typically occupy less than 5,000 sq ft
to areas such as Southwark and London
Bridge, and the north and east City fringes,
as a new influx of larger international
tenants take up residence in the area.
Victoria has recently become a particularly
popular location for the UK offices of
luxury brands including Jimmy Choo,
Giorgio Armani, Moet, Burberry, Gucci and
Stella McCartney.
From another perspective, Victoria offers
tenants based in areas such as Marylebone,
carterjonas.co.uk 17
Mayfair and St James’s the opportunity to
remain in the West End in new, lower cost,
buildings that offer larger, more efficient,
floors, typically in excess of 10,000 sq ft.
PADDINGTON
The Paddington office market has for
many years been the ‘ugly duckling’ of
the West End office market – perceived
by many occupiers as having inadequate
public transport links with other areas
of Central London and a poor array of
retail, banking and restaurant facilities
to serve the local workforce. However,
these factors are reflected in quoting
rents which are appreciably lower than
the rents for office space of equivalent
quality space in locations such as
Marylebone and other comparable West
End locations, including Victoria.
Confidence in the area is growing
as demonstrated by British Land’s
decision to press on with the speculative
development of 4 Kingdom Street,
comprising 145,200 sq ft, which will be
18
completed in early 2017. The Elizabeth
Line, once operational at the end of 2018,
should also give the area a further boost
as transport links improve - journey times
from Paddington will be 3 minutes to
Bond Street, 10 minutes to Moorgate and
17 minutes to Canary Wharf.
SOHO
The construction of the Elizabeth Line
is catalysing the regeneration of a large
swathe of east Soho. The demolition
works associated with the development
of the Tottenham Court Road Elizabeth
Line station have opened up the area and
provided developers with a ‘blank canvas’
enabling new, larger scale, mixed use
developments to be constructed.
Many of the film companies and
advertising agencies that were the
hallmark of the Soho office market have
migrated to Farringdon, Clerkenwell and
Shoreditch – having either been priced
out of the area or forced to move as a
consequence of redevelopment. It is
the Ampersand Building at Wardour Street.
Office rents for refitted Grade A space in Soho
have risen by up to 90% from mid-2009, the
low point in the office market cycle following
the global financial crisis and are now £75.00
- £90.00 per sq ft, reflecting supply side
constraints and the establishment of new
benchmark rents associated with new
office developments.
BLOOMSBURY & HOLBORN
Once regarded as drab and unattractive areas,
associated with the publishing industry and
legal profession, Bloomsbury and Holborn
are now fashionable, established, business
districts. A series of office redevelopments
and refurbishments including 1 Kingsway, 10
Bloomsbury Way and 40 Chancery Lane, that
offer high quality space at significant rent
discounts to the West End have transformed
the area. These buildings have catalysed the
migration of media, creative and technology
companies to the area, including Saatchi and
Saatchi, Warner Bros and Skype resulting in a
radically different and vibrant tenant mix.
The education sector is also an important driver
of demand and is competing against business
users for office space in the under-supplied
Bloomsbury and Holborn office markets. In
mid-2015 King’s College leased 300,000 sq ft
at Bush House, and its sister buildings forming
the Aldwych Quarter, and the London School
of Economics has, over recent years, acquired
office space in and around Lincoln’s Inn.
THE EDUCATION SECTOR IS ALSO AN
IMPORTANT DRIVER OF DEMAND AND
IS COMPETING AGAINST BUSINESS
USERS FOR OFFICE SPACE IN THE
UNDER-SUPPLIED BLOOMSBURY AND
HOLBORN OFFICE MARKETS
inevitable that the tenant mix in Soho
will continue to change over the next
few years as new, larger scale, office
developments attract occupiers from
the financial, business services and
technology and telecoms sectors as they
shift eastward from their more traditional
locations, including Marylebone, Mayfair
and St James’s, in search of better value.
This trend has already established itself
following the lettings to Telefonica and
Generation Investment Management at The
Crown Estates’ Air W1 office development,
located in the south west quadrant of
Soho, and gaming company King Digital
Entertainment has recently taken a lease of
However, rents and business rate costs for new
/ refitted Grade A space remain competitive
compared with West End space located in areas
such as Victoria, Marylebone and Fitzrovia.
COVENT GARDEN / STRAND
The character of the Covent Garden / Strand
office market has changed considerably over
the last 5 years as many of the occupiers from
the media and creative industries have been
displaced by businesses from the financial,
professional services and energy sectors that
have migrated from Mayfair and St James’s, in
search of better value office accommodation.
This influx of new occupiers, with larger rental
budgets, has resulted in rents for prime located
refurbished mid-rise Grade A space increasing
by up to 71% to £72.50 - £85.00 per sq ft per
annum since mid 2010.
carterjonas.co.uk 19
KING’S CROSS
Office rents in King’s Cross have risen
significantly since Q4 2014, by over
20% in some instances. King’s Cross
is now firmly established as a credible
alternative office location to rival the
West End, City and Midtown areas such
as Holborn and Covent Garden. The
67 acre mixed use King’s Cross Central
development is transforming the area
into a vibrant and attractive place to
work, live and shop. The redevelopment
of King’s Cross / St Pancras station,
incorporating the Eurostar hub, has also
reinforced King’s Cross as a credible
alternative office location with sufficient
land to accommodate large-scale office
requirements where build to suit options
can be offered. Google’s decision to
relocate from several buildings in the
West End and Midtown and purchase
land at King’s Cross Central upon
which to develop an office campus
is a case in point. The Eurostar hub
has also influenced other large scale
office occupiers to relocate to the area,
including Universal Music which has taken
a pre-let at 4 Pancras Square, comprising
170,000 sq ft.
HAMMERSMITH
Hammersmith is the capital of the West
London office market and, as with the
Central London office sub-markets, it
is suffering from a severe shortage of
vacant floor space. Landlord’s quoting
rents for new and comprehensively
refurbished Grade A office space have
recorded increases of up to 17.0% since
Q1 2015, reflecting historically low
vacancy levels. Prompted by rising rents
and falling vacancy levels, Legal and
General has recently obtained planning
consent to redevelop Bechtel House, 245
Hammersmith Road, which will comprise
a mixed use retail / office development
of 255,000 sq ft. Completion of the
development is scheduled for
summer 2017.
LANDLORD’S QUOTING
RENTS FOR NEW AND
COMPREHENSIVELY
REFURBISHED GRADE
A OFFICE SPACE HAVE
RECORDED INCREASES OF
UP TO 17% AT HAMMERSMITH
SINCE Q1, 2015
20
TO SUPPORT
BUSINESS
GROWTH
MINIMISING OFFICE COSTS
Property costs are typically a business’ second largest
overhead after staff costs. Because of the rapid inflation
in office costs over the last few years – brought on,
principally, by unprecedently low vacancy levels and the
2010 business rates revaluation - increasing numbers of
office occupiers are migrating to lower cost areas. Many
are using their relocation as a catalyst for change in their
working practices and use of technology in order to
minimise their property footprint and reduce operating
costs. As a consequence, a number of trends are
emerging among London based office users, including:
• c
hoosing buildings that have been designed
to accommodate a higher occupancy density –
traditionally office buildings have been constructed
to accommodate one person per 107 sq ft / 10 sqm
but improvements in building design and technology,
particularly with regard to air conditioning capacity,
coupled with IT hardware that generates less heat, is
enabling developers to create buildings capable of
accommodating up to 1 person per 87 sq ft / 8 sqm.
• hot desking – the sharing of workstations between
staff that are not permanently office based. This
office occupancy strategy is particularly relevant to
management consultancies and sales organisations
that employ high numbers of project/field based staff.
• ‘agile’/remote working – increasing numbers of
organisations are exploiting the freedom to operate
remotely from the office which has been conferred
by advances in mobile data / telecoms technology,
including the use of laptops, smartphones and tablet
computers, which has enabled some occupiers to
reduce their property footprint.
• s
maller desk sizes – ten years ago desks were
typically 1600 -1800mm wide. Advances in flat screen
technology and the greater use of laptops and tablet
computers, coupled with electronic, rather than
hard copy, filing means that today’s office workforce
can work as efficiently with smaller desks of 1400 1500mm.
carterjonas.co.uk 21
• c
loud technology – the use of cloud
computing technology negates the
need to develop dedicated data
/ telecoms rooms, incorporating
expensive supplementary air
conditioning systems, and also enables
savings to be made in the quantum of
floor space to be leased.
• fi
tting out costs are typically one
of the largest items of capital
expenditure associated with an office
move. There are several ways in which
these costs can be mitigated, including:
-- leasing space that is being marketed
with the previous tenant’s fitting
out works in situ – although some
adaptation may be required, it is
often possible to make significant
savings by modifying a previous
tenant’s fit out
-- m
aking use of HMRC tax reliefs
including Investment and Capital
Allowances
-- u
sing tax efficient finance leasing to
fund the fitting out works
ISSUES TO ADDRESS WHEN
NEGOTIATING A LEASE
Whether negotiating a new lease on
existing premises or relocating to
alternative premises, we recommend
that the key issues set out below are
addressed in the lease negotiations in
order to secure best value lease terms.
negotiations become protracted.
• financial components
-- rent discount
-- r ent free period and break option
linked rent free periods
-- landlord capital contributions
towards any refurbishment / fitting
out works that the tenant may wish
to undertake
• limiting exposure to increases in
annual running and future “exit” costs
by including:
-- a service charge cap
-- a
rent review cap - where the LL is
seeking to include a rent review
-- a
schedule of condition to record the
condition of the office space before
the lease is granted – to limit future
repairing and dilapidations costs
-- p
rovisions that limit the scope of the
tenant’s repairing obligations
• b
uilding flexibility into the tenancy by
addressing:
-- the length of lease to be granted
-- t he timing and frequency of tenant
only lease break options
-- t he minimum period of notice
required to exercise the break
option(s)
-- t he scope of the pre-conditions
to be complied with in order to
exercise the break option
• security of tenure
IT IS GOOD PRACTICE TO START THE
NEGOTIATIONS AT LEAST 18 MONTHS
BEFORE A TENANCY EXPIRES,
PARTICULARLY IN A MARKET WHERE
RENTS ARE LIKELY TO CONTINUE RISING
When embarking on a lease renewal, and
to strengthen the tenant’s bargaining
position, it is good practice to start the
negotiations at least 18 months before
the tenancy expires, particularly in a
market where rents are likely to continue
rising. Adopting this timeframe will
allow sufficient time to effect an orderly
relocation if terms for a new lease cannot
be agreed, as well as conferring on the
tenant a stronger bargaining position
and the ability to use the credible
threat of relocating if the lease renewal
22
-- exclude landlord break options
-- w
here landlord break options are to
be included, ensure that they can
only be exercised on meeting certain
pre-conditions, for example, when
the landlord wishes to redevelop – as
evidenced by placing a demolition
or building contract
-- n
egotiate a lease that is to be
granted within the security of tenure
and compensation provisions of
the 1954 Landlord and Tenant Act,
which confers rights on tenants of
business premises to a new lease
and compensation in the event that
the landlord wishes to redevelop the
property or occupy for its own use
carterjonas.co.uk 23
THE CARTER JONAS
TENANT ADVISORY TEAM
Our tenant representation services include:
•
Lease and rent review negotiation
•
Office search and relocation
management services
•
Relocation budgeting and planning
•
Repairs/dilapidations assessment and negotiation
•
Building, air conditioning and passenger
lift surveys
•
Business rates analysis and appeal
•
Service charge audit
36 OFFICES ACROSS
THE COUNTRY,
INCLUDING 12 IN
CENTRAL LONDON
COMMERCIAL OFFICES
• London
• Bath
• Cambridge
• Leeds
• Oxford
For more data on the Central London office market, office
availability, rents and rent free periods and information on
budgeting and planning for a lease renewal, rent review or
office relocation please contact one of the team.
KEY CONTACTS
CASE STUDIES
Lease negotiations and relocations 10,000 sq ft+
37,000ft
Frank Hirth
236 Gray’s Inn Road, WC1
Michael Pain Partner
020 7016 0722
[email protected]
33,000ft
UK Payments Administration
2 Thomas More Square, E1
Jeremy Gidman Partner
020 7016 0727
[email protected]
28,000ft
Warner Bros / Shed Media
85 Grays Inn Road, WC1
23,000ft
Nursing & Midwifery Council
Two Stratford Place, E20
17,500ft
Hackett Limited
The Clove Building, SE1
16,000ft
Circle Housing
Two Pancras Square, N1
15,000ft
Hitachi Rail Europe
40 Holborn Viaduct, EC1
Darren Yates Head of Research
020 7518 3343
[email protected]
11,000ft
Salamanca Group
50 Berkeley Street, W1
One Chapel Place, London W1G 0BG
carterjonas.co.uk/officesearch
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© Carter Jonas 2016. The information given in this publication is believed to be correct at
the time of going to press. We do not however accept any liability for any decisions taken
following this report. We recommend that professional advice is taken.
Greg Carter Associate Partner
020 7518 3303
[email protected]
Ed Caines Associate
020 7016 0724
[email protected]
Luke Wild Associate
020 7016 0725
[email protected]