Carter Jonas, the national property consultancy, has released its second quarter analysis of London office occupancy costs – rents, business rates and service charges – for new and refitted Grade A office space over 5,000 sq ft. Providing that there is no hard Brexit, the research indicates that rents in the West End, Midtown and South Bank office markets are set to rise during H1 2020. By contrast, rental growth in the City is likely to be deferred until H1 2021, due to higher vacancy in that sub-market.
Rents for new and refitted Grade A space in most parts of the West End, Midtown, South Bank, City and City fringe are forecast to rise by, typically, £2.50 per sq ft per annum over the two year period to Q2 2021 – driven by low vacancy and stronger than anticipated post-Brexit vote occupier demand.
In areas of acute low vacancy, such as Mayfair, Soho, Fitzrovia, Southwark and King’s Cross the increase in rents is likely to be nearer to £5.00 per sq ft per annum over the same period.
Michael Pain, Head of Tenant Representation Team at Carter Jonas, said: “Occupiers that are considering a relocation to new or refitted office space, should be aware that the window of opportunity to secure competitive lease terms is narrowing – given the likelihood that landlords will begin pushing up advertised rents in many parts of London next year as vacancy, and choice, declines.”
Occupancy Cost Disparity
Since Q2 2018, rent, business rates and service charge occupancy costs have increased by over 3 percent in Farringdon, Canary Wharf, Holborn and Mayfair – due, principally, to the construction of new Grade A developments that have set new rent benchmarks in these sub-markets. By contrast, occupancy costs across many parts of the London office market have increased by less than 1 percent over the same period.
The disparity in real estate costs is continuing to fuel the eastward migration of occupiers to the City and City fringe sub-markets. In the City, occupancy costs for new Grade A office space are currently around £70.00 per sq ft per annum lower compared with space of equivalent quality located in Mayfair and St James’s, where occupancy costs are typically £173.20 per sq ft per annum.
In the City fringe sub-markets, Stratford and Canary Wharf continue to offer the best value for new and refitted Grade A space – with occupancy costs of, typically, £71.10 and £84.50 per sq ft per annum, respectively.
Pain comments: “Occupiers not already based at Stratford and Canary Wharf have, historically, tended to be resistant to moving to these sub-markets because of their peripheral location. However, the development of Elizabeth Line stations at Stratford and Canary Wharf is changing occupiers’ perception of these business districts – a factor that has spurred Canary Wharf Group to press on with the speculative first phase of Wood Wharf.”
Static Rent Free Periods
Across many parts of the London office market, rent free periods have remained broadly static during the 12 months to Q2 2019. However, Carter Jonas’ research indicates that – barring no hard Brexit – rent free periods could decline by two to three months from their current levels, for a five to ten-year lease, by Q4 2020, especially in the Midtown, South Bank and West End sub-markets, where vacancy is particularly low.
Dan Francis, Head of Research, Carter Jonas, concluded: “Notwithstanding the uncertainty associated with Brexit, demand for new and refitted Grade A floor space throughout London continues to be resilient. The shift in workforce demographics, as the proportion of ‘Gen Z’s’ and ‘Millennials’ in the employment market increases, is driving the demand for new and refitted Grade A space. Employers realise that to attract and retain the best they must offer a smart, vibrant and engaging working environment.”