June 21, 2016
The continuing imbalance between the supply and demand for office space throughout London is resulting in a shift in the balance of negotiating power away from tenants, according to the latest London Office Update from Carter Jonas. Rents across Central London have, on average, risen by over 50 percent over the last five years in the West End, Midtown and South Bank office markets, and by over 30 percent in the City of London. Rent free periods have typically fallen by up to six months over the same period. In the next 18-24 months, the trend will continue to be higher rents and shorter rent free periods as availability remains low. While some occupiers may leave London altogether, others may adopt a ‘spoke and hub’ strategy, whereby back office functions relocate to peripheral, lower cost, areas while ‘client facing’ operations are retained in Central London. This prediction assumes that Britain rejects Brexit however, and there are no major economic shocks.
The financial services sector remains a major driver of demand for Central London office space. However, recent surveys show that growth is weak, reflecting limited merger and acquisition activity and financial market volatility. If this trend continues and occupier demand weakens, rental growth is likely to ease, particularly in the City of London, helping to relieve the upward pressure on office costs.
For those tenants where property cost mitigation is more important than the disruption of staff commuting patterns – and consequent potential loss of some staff – Stratford and Docklands are now the only two established London office markets that offer refurbished, air conditioned, office space at rents below £40.00 per sq ft per annum.
However, new office developments currently under construction and new infrastructure improvements such as the Elizabeth Line will open up new business districts on the Central London periphery.
These will challenge the pre-eminence of established locations such as the West End, Midtown and City of London and should relieve the upward pressure on rents by offering tenants more choice and a better bargaining position.
The data suggests that tenants with rent reviews or lease expiries in the next 18-24 months are likely to suffer unwelcome increases in occupancy costs. However, the medium term outlook is brighter, with occupiers expected to have more choice, a stronger negotiating position and the prospect of slower rental growth.
To read the full report click here.