In June 2014 it was announced that London’s West End had retained its title as the world’s most expensive location for office space for a second consecutive year. Occupational costs per square foot in the London submarket were 14% higher than the next most expensive, Hong Kong.
As the economy recovers, the commercial property team at Sherrards is seeing demand for office space in the capital grow, and supply cannot keep up.
Services sector is driving demand in the City
London is the host of more global and regional company headquarters than any other European city. Financial services, insurance and business and professional services are predicted to be the biggest drivers of the growth in the City and will continue to be an important driver of office demand. This year alone, the number of London office based jobs grew by 7%.
Available office space in Central London at six year low
As firms move to acquire additional square footage, the amount of available Central London office space has fallen by 20% in the last year. Indeed at present, there are just five empty, ready to let buildings across the whole of Central London that can provide over 100,000 sq ft of space.
The Docklands have seen a particularly large increase in take-up and the north-west fringe of Central London has also become a target for company moves.
The amount of new construction across Central London has fallen this year and available office space in Central London is at the lowest level for six years. However, there is some good news as 2014 is expected to see a spike in the delivery of new office space as projects initiated by developers at the first signs of economic recovery in 2011-2012 are now approaching completion. Indeed it is estimated that 7 million sq ft of new office space will be completed this year, the highest since 2003.
New office space unlikely to make much of a dent in meeting demand
This will likely have little effect on the market however, as much of the space under construction has already been let with potential customers starting the search for new or bigger premises as much as two years before the end of their existing lease. In Land Securities’ City development, known as the “Walkie Talkie”, lets for 87% of the office space have already been agreed.
Lack of supply likely to continue for the next few years
Looking ahead, it looks as if new space will be in short supply for the next few years as work continues on buildings in the next phase of construction. There is currently 4.5 million sq ft of space under demolition or undergoing a major strip out in Central London, while planning permission was granted for 3.2m sq ft of new office space in the last six months with the average time taken to achieve planning permission being nine months per scheme! In the West End, a lot of buildings are subject to a listing or other such restrictions, hindering plans for refurbishment and new builds.
Roll on 2018!
Conditions are starting to improve however, as developers experience easing credit conditions as lenders’ sentiment towards speculative developments has brightened! However, analysts are saying it will be 2018 before the peak of the next development cycle is reached.
Higher rents force companies to look elsewhere
As companies fight over limited prime office space, rents are inevitably driven up, and as rents in the Square Mile skyrocket, we are seeing prospective tenants look further afield for office space. Improving communication and transport links make other locations a more viable option for businesses looking to relocate. Battersea Power Station is an example of where regeneration means businesses are happier to consider operating offices, moving outside of the usual financial centres.
For help and advice with commercial property in London, please feel free to contact Sherrards Solicitors’ Commercial Property Team.