Carter Jonas releases Q3 analysis of London occupancy costs

Carter Jonas, the national property consultancy, has completed its Q3 analysis of London office rents, business rates and service charge occupancy costs for new and refitted Grade A space.

Key findings of the research are:

  • Highest rent increases – Rents for prime located, new, Grade A space have risen the fastest in Paddington and Farringdon – both districts have recorded increases of 15.4% since Q3, 2017, up from £65.00 per sq ft to £75.00 per sq ft for mid-rise floors, representing record highs for both areas.
  • Forecast rental growth – the winners and the losers – Southwark, Holborn, Farringdon, King’s Cross, Paddington and Victoria are each forecast to see rents for new, prime located, Grade A space increase by over 3% by Q3, 2020, assuming that the UK avoids a hard Brexit. Secondary City locations, Shoreditch, Spitalfields and Docklands are forecast to see rents decline, typically by around 4%, over the next two years as landlords compete for tenants in sub-markets with less constrained vacancy levels and which are, themselves, competing against each other. This represents a modest readjustment in rents in the wake of Brexit uncertainty.
  • Quality of space and place – Employers are becoming increasingly aware of the importance of the need to create an office environment and culture that will attract and reinforce the retention of high calibre staff – without which the productivity and profitability of their businesses will suffer.

Michael Pain, Head of the Tenant Advisory Team, Carter Jonas, said: “Ten years ago occupiers’ primary property selection criterion would have been cost. Today’s tenants are more sophisticated and understand that cheap, poor quality, buildings are likely to hinder recruitment and foster higher staff turnover and, ultimately, poorer productivity and lower profitability. The greater emphasis by occupiers on workplace environment, rather than cost, explains why we are seeing much stronger levels of take-up of new Grade A space across London. This contrasts with the second-hand market where vacancy levels are set to rise as tenants trade up into new space.”

  • City of London occupancy costs static – Rent, business rates and service charge occupancy costs for prime located, new, Grade A City space have remained broadly static since Q3, 2017 and are currently at £102.50 per sq ft per annum for mid-rise space.

Pain added: “Rents tend to be the biggest influencer in the movement of occupancy costs and rents for well located, new, Grade A space in the City have remained broadly flat over the last twelve months due to low vacancy and better than forecast take-up. Between them the co-working / serviced office, media, technology and creative sectors have plugged the gap in demand left by the bankers. No bad thing as we see a City office market evolving with an increasingly diverse occupier base as it attracts a new generation of tenants with interesting, iconic, buildings that offer better value than other sub-markets.”

  • Decline of Mayfair and St James’s – Rent, business rates and service charge occupancy costs have declined by 5.6% to £167.00 per sq ft per annum since Q3, 2017 as rents continue to decline for prime located, new, Grade A space.

Commenting on this trend on the Pain added: “Elizabeth Line transport connectivity and the availability of larger, better value, buildings that enable occupiers to operate more efficiently over fewer floors have attracted some occupiers away from St James’s and Mayfair to districts such as Paddington, Fitzrovia and Bloomsbury.”