16 September 2013, Combined costs for office occupiers across Central London have increased by up to 66% since mid 2009, according to new research by Carter Jonas, the property consultancy.

Rent increases have been witnessed in all the Central London office sub markets: West End, City of London, Docklands, Midtown and South Bank, driven principally by the limited supply of vacant floor space rather than an upsurge in demand.

The research included an analysis of the three principal costs of occupying office premises: rent, business rates and service charge costs, for prime located, new and refurbished, Grade A space, since mid-2009. The findings of the research project are summarised below:

• The West End has seen combined costs increase by between 42% and 66% from £85-£118 per sq ft to £141.50-£167.50 per sq ft per annum since mid 2009
• The City's combined costs increased by 18% from £67-£78.25 per sq ft to £79-£92.50 per sq ft per annum during the same period
• Canary Wharf has recorded lower rates of increase in office costs, reflecting the fact that it is the only sub-market that currently has an oversupply of vacant office space due to the significant ‘downsizing' in headcount in the banking and legal sectors. Combined costs increased by between 10% and 14% from £54-£67 per sq ft to £61.59-£73.84 per sq ft per annum
• In Midtown combined costs have risen by between 34% and 39% from £64.75-£78.25 per sq ft in 2009 to £90-£105 per sq ft per annum today
• In South Bank, combined costs have increased by between 23% and 38% from £50.50- £67.25 per sq ft in 2009 to £70-£82.75 per sq ft per annum

Michael Pain, head of Central London tenant representation team at Carter Jonas said: "2009 was used as the year to compare the increases in office overhead costs in the various Central London office sub-markets because mid 2009 is generally accepted as the low point in the office market cycle, following the international credit crisis. It is also the year that immediately preceded the business rates re-valuation of commercial property which took effect from 1 April 2010. The re-valuation has resulted in significant above inflation increases in business rates payable in many Central London locations, most notably in the West End in areas such as Mayfair, St James's, Marylebone, North Oxford Street, Soho and Victoria."

West End versus The City Office Costs
Comparing the West End versus the City office costs, prime West End office rent, business rates and service charge costs are currently circa £62.50 to £75.00 per sq ft per annum higher when compared with City office overheads, representing an approximate 80% differential.

Migration East
"The very significant disparity between West End and City office overheads has catalysed a growing trend for some cost sensitive occupiers such as media, law, management consultancy and IT companies migrating east to Midtown, the City and north City fringe, including areas such as Farringdon and Clerkenwell." added Michael Pain.

Supply Side Constraints
"There are significantly greater supply side constraints in the West End compared with the other Central London office sub-markets due to restrictive town planning policies that are biased towards preserving the historic streetscapes in areas such as Mayfair and St James's, which limits the scope for the development of new, larger, office buildings. The increasing trend towards the conversion and redevelopment of office buildings to higher value residential use has been another factor that has reinforced the limited supply of vacant office floor space in the prime areas of the West End, aided and abetted by planning policy which promotes the use of office buildings to residential use, particularly in the case of historic buildings which may have originally been developed as residencies," said Michael Pain.

Future Trends
"It is quite likely that in the absence of any significant increase in speculative office development activity in Central London, and as the UK economy returns to sustained economic growth, the 2 supply of vacant office floor space will continue to be insufficient to meet the upturn in tenant demand," added Michael Pain.

"Given that it typically takes two to three years to complete medium to large scale office development projects, it is unlikely that the current imbalance between supply and demand will be addressed in the short term - the consequence of which will be continued upward pressure on rents.

"Based on the likely future trends in demand, we anticipate that rents for prime located office space will have grown by around 6-12% by the end of 2015, with rental growth being most pronounced in areas of particularly tight supply including, for example, Mayfair, St James's, North Oxford Street, Soho and Covent Garden," concluded Michael Pain.