Can the West End keep performing through the crunch?
London’s West End office market had another strong year in 2007.
The credit crunch, which has had such an impact on the investment market, hardly seems to have affected occupiers at all.
Research by Cushman & Wakefield shows that 1.1m sq ft was let in the West End in the final quarter – the highest take-up in any quarter for two years. The take-up for the whole of 2007 was the highest since 2000. The vacancy rate has now fallen to 3.1%, compared with 5% a year earlier.
The strong market conditions have been reflected in rents. Nine West End lettings in the final quarter secured more than £100/sq ft, bringing the total for the year to 16.
Fifty lettings for more than £80/sq ft were achieved in 2007 – almost five times more than in 2006. There are many examples of last year’s growth in rents. In mid-2007 a letting was signed at £80/sq ft on Mayfair’s North Audley Street. By the end of the year, another floor in the same building was let at £95/sq ft. On Old Burlington Street, also in Mayfair, the rent in one building went from £95 to £109/sq ft in a matter of months.
These market conditions have been caused by several factors. The long-term issue for the West End is always the limited opportunity for large-scale developments because of a tight planning regime and the difficulty involved in assembling them.
Demand has been led by the financial sector, at least part of which would have looked to the City as its preferred location in the past.
However, the vibrant environment of the West End and the easy access to prime residential locations has attracted those businesses serving wealthy individuals.
Demand has been concentrated on the best-quality space, however. Secondary space – especially that being sublet by existing tenants has proved harder to shift.
These are exciting times for rent review surveyors. Cushman & Wakefield’s prime rent for Mayfair and St James’s at the end of 2007 was £130/sq ft. This compares with £67.50/sq ft five years earlier the typical rent review cycle.
As a result, many occupiers, including my own firm, are potentially facing substantial increases in rent on review. The first £100/sq ft rent review has already been seen in Mayfair but, as always, rent review surveyors will be looking at hard evidence of comparable transactions, rather than relying on mere market sentiment.
For someone like me, who remembers the City of London as the premier location, rental levels there are in stark contrast to the West End. Prime rents are now £65/sq ft and compare with £52.50/sq ft five years earlier an increase of just 24%, compared with 92% in the West End.
With supply in the West End still tight, especially for good-quality space, and with demand being maintained, market conditions suggest there is room for further rental growth in 2008.
Anyone involved in property which probably means everyone through pension funds and investments will be watching closely to see whether the turmoil in the property investment market and now in financial markets generally will finally bring the West End market to a halt.
Simon Curtis – Property Week 08.02.08