26 June 2015, Tenants throughout London are seeking to reduce their property footprint to keep operating costs at a minimum as office rents across the nine sub-markets are forecast to rise by an average of 13% by mid 2017, according to Carter Jonas’ quarterly review of office costs and market trends which is featured in the property consultancy’s ‘Central London Office Market Update Q2 2015’ report, published today.

In the wake of continued rent and business rates increases substantially above the rate of inflation, businesses throughout Central London are exploiting advances in mobile data/telecoms technology to reduce their property footprint and operating costs: remote working and hot desking are now established trends among occupiers.  The migration east from the West End to lower cost locations in the City, City fringe, South Bank and Docklands, is another common theme that has emerged in the London office market over recent years, and has similarly been prompted by substantial increases in office costs in the West End.

Rental Growth Predictions – Q2 2016 & Q2 2017

Based on the persisting undersupply of vacant office space, office development completion, and assumptions on demand for office space, in all of the nine London office sub-markets, Carter Jonas has predicted that office rents will continue to rise at least until mid 2017 when office developments that are currently under construction/refurbishment will begin to reach completion, providing tenants with more choice which should ease the upward pressure on rents.

 

Michael Pain, partner, head of tenant advisory team at Carter Jonas said:  “In the month that has seen rents for super-prime office space in the West End exceed £180.00 per sq ft – a new all-time high and making London one of the most expensive office locations in the world – tenants are acutely conscious of the need to reduce their property footprint to minimise operating costs.  We are seeing many companies, especially in the legal, media and business services sectors either reviewing their property footprint or seeking to relocate to the lower cost peripheral sub-markets “

Pain added:  “For the first time since the banking crisis, Docklands has recorded double digit rental growth of up to 13% since Q2 2014.   Quoting rents in the east City fringe have risen by up to 40% over the same period as landlords increase rents and exploit the upturn in demand for these hitherto unfashionable office locations which now represent the last few remaining areas of London where it is still possible to lease second-hand, refurbished, air conditioned, office space for under £40.00 per sq ft.”

Comparison of Total Office Occupancy Costs – Q2 2014 Vs Q2 2015

The West End has seen rent, business rates and service charge costs increase by up to 16% to £164.25 - £217.75 per sq ft per annum since Q2, 2014 for prime located space in Mayfair and St James.

Combined occupancy costs in the City core have increased by up to 11% to £85.50 - £108.25 per sq ft per annum during the same period.

Office occupancy costs for prime located space in the West End are therefore up to 101% higher than equivalent quality space in the City core – a statistic that explains the now well established trend for some West End occupiers to migrate east to the City, City Fringe and Docklands sub-markets.

Canary Wharf has recorded lower rates of increase in office costs, reflecting a lower level of rental growth due to the fact that it is one of the few sub-markets that currently has a more even balance between demand and the supply of vacant office space.  Combined costs have increased by up to 13% to £69.83 - £79.93 per sq ft per annum.

In Midtown combined costs have, relative to other sub markets, risen the least - by 3.5% to £97.75 - £113.25 per sq ft per annum today. This low increase is explained by the limited number of new development completions in the area which would otherwise set new rent benchmarks and the tendency of some occupiers to migrate to lower cost areas including the adjoining City of London.

On the South Bank, combined costs have increased by up to 12.5% since Q2 2014 to £81.00 - £96.50 per sq ft per annum, making office costs in the South Bank up to 56% cheaper compared with prime located West End office space, which explains why some occupiers based in Mayfair and the surrounding area have relocated to the South Bank.

Figure 3, featured in the “Office Market Update Report in Q2 2015”, provides a summary of typical rent, business rates and service charge costs in the various London office sub markets.

Movements In Office Rents By Sub-Market – Q2 2014 Vs Q2 2015

The table below provides a summary of the changes in office rents for new and refitted Grade A office space in the various Central London office sub-markets for the period Q2 2014 – Q2 2015.  The rents for the upper floors of tower buildings have been excluded.

 

Market Trends

Secondary locations in the City of London such as St Paul’s, Cannon Street and Blackfriars have recorded some of the highest increases in landlord quoting rents of 11.1 – 21.7% over the last 12 months, when compared with the other Central London office sub-markets, as City core based occupiers that are seeking better value, or are being displaced by redevelopment, compete with migrating West End and Midtown occupiers seeking office space that offers lower rent and business rates overheads.  Rent increases at the higher end of the rental growth range have been set by new and refitted mid-rise buildings such as 100 Cheapside, EC2, and The Sugar Building at St Paul’s where the landlord’s guiding rents are over £70 per sq ft per annum.

The increases in City Fringe North (Clerkenwell, Shoreditch and Farringdon) office rents, which have been catalysed by the influx of technology and creative companies into the area over the last few years, and an increasing trend towards redeveloping older office buildings for residential use, is gradually eroding the area’s advantage as a low cost office location.  Since Q2, 2014, rents in the area have increased by up to 18% for new/refitted space.  As a consequence, some occupiers are widening their areas of search, when contemplating a relocation, to include lower cost areas including the east City fringe (Spitalfields, Aldgate and Tower Hill) Stratford and Docklands and the resultant increase in demand in these locations is encouraging landlords to raise rents and shorten rent free periods.

City Fringe East, by contrast, has recorded rent increases of 28.6 – 40.4% since Q2 2014 – the highest levels of rental growth of any of the London office sub-markets.  This trend is partly explained by the upturn in demand in this sub-market as City, West End and Midtown occupiers compete to secure cost effective space in one of the last remaining low cost areas of Central London.  In addition, new office developments such as The Steward Building in Spitalfields and refurbishments such as Commodity Quay at St Katherine Docks, E1 have set new rent benchmarks for the area of £69.50 and £60.00 per sq ft, respectively.

The South Bank – London Bridge and Southwark - has recorded sizeable rent increases of 15.8 – 18.2% since Q2, 2014, reflecting supply side constraints and the trend for Midtown and West End based occupiers to migrate south of the Thames to secure office space where combined rent, business rates and service charge costs are up to 56% lower compared to prime located space in Mayfair and St James’s.  Examples of West End tenants migrating south include Boodle Hatfield which relocated from Mayfair to 23,608 sq ft at 240 Blackfriars Road, SE1 and Howard Kennedy which relocated from Cavendish Square to 54,500 sq ft at 1 London Bridge SE1.

Docklands has, for the first time since the banking crisis, recorded double digit rental growth of up to 13% since Q2 2014 – reflecting demand from occupiers seeking out refurbished, air conditioned, office space under £40.00 per sq ft.

Docklands, Stratford and the East City Fringe are the only remaining sub-markets that offer refurbished second hand, air conditioned, office space at rents below £40.00 per sq ft.

Once operational in late 2018, Crossrail is likely to reinforce the trend for West End and Midtown occupiers to migrate East to the City, City Fringe, Docklands and Stratford.

In the next three to five years, Battersea/Nine Elms in South West London, Croydon to the South, Silvertown, Stratford, Wood Wharf to the east and White City, Old Oak Common and Wembley to the west are likely to emerge as credible, well connected, alternative lower cost office locations as a consequence of regeneration initiatives.

You can download our full research on Central London Q2 guide to rents and rent free periods by clicking here.