Growing commercial occupier demand set to price firms out of the City fringe

A “west-to-east” migration, focussing predominantly on Clerkenwell and the western City core, is continuing amongst media and service sector businesses seeking more affordable London rents. But according to Cluttons’ latest West End Office Market report, many firms seeking the combination of value and idiosyncratic space are set to be priced out of the current City fringe. The area between the City and West End – branded Noho by estate agents – is attracting a new wave of private equity and extraction firms, willing to pay premium rents for new or pipeline space just north of Oxford Street. Meanwhile, prime office rents in Mayfair / St James’s have broken through the £100 per sq ft ceiling once again as a handful of tenants continue to favour location over quality.

“Improving economic sentiment is filtering through to the commercial occupier market as West End transaction volumes increase. However, this upturn is not uniform across the market with a clear reluctance to pay top prime rents amongst all but a select cohort of businesses”, commented Sue Foxley, head of research, Cluttons.

“While cost frames decision making for most in the market, there is little appetite for compromising on the quality of space. Ironically the City core now offers tenants a cheaper alternative to the West End core, but the corporate nature of the space and environment available fails to fit the brief for many businesses. This is driving moves into non-core areas, both around the West End and eastwards.

“As the cross market migration continues and tenants seek surroundings that meet both staff and public image requirements, it is the market fringes, rather than the prime core, that are feeling the greater pressure on rents. This will be an on-going story. Many companies seeking the combination of value and idiosyncratic space are set to be priced out of the current City fringe, pushing boundaries further, as well as unlocking new market milieus.

“Prime central London investment options remain limited as prevalent demand places further downward pressure on yields, with trophy assets often transacting at sub 4%. Offices to residential conversions continue to be subject to bidding wars, often trading in excess of asking prices, while UK institutions and pan-European funds target higher yielding secondary assets as attitudes to risk start to ease.”