London's office markets

Copyright: David Lawson – Financial Times May  2001

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The City

Agents have been overloading transatlantic phone lines in the last couple of months trying to separate fact from rumour over US banks  suffering under the  slowing global economy. Financial giants like Morgan Stanley, which announced 1,500 job cuts last month, are major consumers of London’s property.  Docklands is particularly vulnerable, says Nick McCalmont-Woods of real estate consultant GVA Grimley. Morgan Stanley alone has 5,000 staff in Canary Wharf and firms like Lehman and CSFB have taken large chunks of new space in the last year. But while everyone is on tenterhooks, few are forecasting disaster.

  Rupert Cherryman of consultants Chesterton, who  has been dealing in Docklands longer than most, points out that non-financial groups like McGraw-Hill, Clifford Chance and Allen & Overy  are equally important. Pent-up demand is running well beyond potential supply and if  space comes back on the market it will command rents at least as much as Canary Wharf is demanding for pre-lets, something over £45 a sq ft..

  The City also has a cushion against potential layoffs. Analysts bandy around  estimates of 20,000 job losses in London as financial services come under pressure, which is roughly equivalent to around 3.5m sq ft of space. Yet demand from professional services alone almost doubled to more than 2m sq ft in the first three months of this year, according to figures just published by DTZ Research.

  Non-US banks also remain relatively buoyant because of the strength of the European economy. Barclays and Societe Generale are among an elite group seeking 3m sq ft to expand or relocate. All this at a time when less than 1m sq ft of new space will be available within 18 months.

  Prime rents have responded to this imbalance by jumping from £52.50 to £60 a sq ft this year. Hammerson, one of the top five UK developers, is confident enough they will keep rising to have just spent £27m buying out the minority interest in  Spitalfields Development Group to create 750,000 sq ft of offices on the City fringe.    No-one is shrugging off the dangers, particularly when moves to Canary Wharf will also release massive amounts of second-hand space in a couple of years. HSBC alone is dumping 12 buildings. But agents remain remarkably upbeat. ‘None of the deals we are working on for US firms have been halted,’ says  Nick Baucher,  head of City offices at consultant CB Hillier Parker.  Cherryman is equally sanguine. The last crisis in 1998 left City and Docklands unscathed, he says. Investors will be hoping for a repeat performance.

West End

It is well into the evening before Stephen Musgrave can spare time to talk about the impending collapse of London’s office markets. Office hours are too crowded with planners, tenants, half-done deals and buildings spilling off the drawing board. Reality does not appear to match gloomy headlines.

   Six months ago rents were heading towards the magic £100 a sq ft mark as tenants scrambled for the last remnants of available space.  The dotcom crash and slowing US economy  were confidently predicted to turn boom quickly back to bust. ‘But we are not staring into an abyss, just at a bumpier road,’ says Musgrave, development director for the Grosvenor Estate, one of the West End’s biggest landlords.

   No-one denies that demand has weakened. Top rents are less than £90 and average figures around half that. Demand from IT and telecoms firms more than halved in the first quarter compared with 1.3m sq ft late last year, according to figures just released by DTZ Research. But this has to be set against an insatiable hunger by  the professional and corporate sectors which each want more than 1m sq ft to expand

  Doomsayers are making the same old mistakes believing the West End is driven by newcomers paying top rents, says Nigel Kempner, head of development company Benchmark. More than 90% of deals – and almost as much of the office stock – lies  below the thin crust which commands so much attention. Growth is still strong in what he calls ‘value’ space with rents of £45-55 a sq ft

   Overall takeup rose almost 30%  in the first three months of this year to 1.4m sq ft, says DTZ. Inquiries are down but still higher than six months ago. Supply has crept up but represents less than 4% of total stock – almost all in second-hand buildings. Chances of filling this gap are limited. ‘Sites are just not becoming available,’ says Kempner.

 This is concentrating attention on fringe areas, where opportunities are easier to find.  Land Securities, Britain’s largest property company, anticipated this by taking a stake in plans for almost 2m sq ft of  development in Paddington. It has also joined forces with Grosvenor and Railtrack to revive Victoria as an alternative location. Musgrave says any impact from current troubles will be forgotten by the time these schemes mature in a couple of years.  ‘When you are in a company which has been around for 300 years,   it is easier to put such things in perspective,’ he says,  before rushing off to plan for what he insists will be a quick recovery.