Knight Frank forecasts London office rent recovery

Knight Frank has forecasted:

· City prime rents to rise by 4% in 2010 to £44.00 per sq ft having fallen 21% in 2009 to £42.50 per sq ft
· Between now and the end of 2013 City rents to increase by 37% to £58.00 per sq ft
· West End prime rents to rise by 3% in 2010 to £67.00 per sq ft having fallen 30% in 2009 to £65.00 per sq ft
· Between now and the end of 2013 West End rents to increase by 42% to £92.50 per sq ft

The market has not seen as great a level of sub-let space return to the market from tenants as had been widely anticipated earlier in the year. There has been a significant revival in the level of active requirements, particularly large unit searches, which are converting into deals. Examples of this are the lettings by Nomura (Watermark Place), Bank of Tokyo-Mitsubishi (Ropemaker), and Orrick Herrington & Sutcliffe (107 Cheapside).
 
The rapid correction in prime rents has succeeded in drawing occupiers back to the market, as they have moved to take advantage of the tenant-friendly environment. In real terms, City rents are currently at their lowest level for more than 20 years, while West End rents are at a 13 year low.
 
Knight Frank has forecasted a combination of a global economic recovery and diminishing choice of new build options to stabilise prime rents at their current levels for the next twelve months, before rental growth returns in Q4 2010. This, Knight Frank has predicted, will mark the beginning of a new cycle for prime rents.
 
James Roberts, head of Central London research, Knight Frank said: “Rents corrected very sharply in 2008 and early 2009 in anticipation of tenants sub-letting large volumes of space. While availability has increased this year, it has not been to the extent priced into the rents and consequently rent levels have found the floor. With global capital markets and world trade, the key drivers behind Central London’s economy, now rallying I see demand increasing gradually going forward, with a knock-on effect for rents from late 2010 onwards.”
 
Will Beardmore-Gray, head of City leasing, Knight Frank said: “The City has seen a marked increase in activity since its low point in quarter one. Even if you set aside the 540,000 sq ft Nomura deal, Q3 take-up looks set to top that of Q2, which was up by a third on Q1. There is a definite upwards trend in activity emerging – it is certainly not a fresh boom, but it is a steady return to normality. The current wave of demand is partly driven by Asia-Pacific financial firms, like Bank of China, Daiwa Securities, Bank of Tokyo Mitsubishi, Macquarie Group and Nomura. I see the City as benefiting from its status as a hub in the system of global trade.”

Tim Robinson, head of West End leasing, Knight Frank said: “Earlier this year there was a great deal of concern that there would be a post-Lehman implosion of the hedge fund world, leaving the West End core over-supplied. While availability has risen significantly, the increase has been of a manageable level, and not greatly different in size to that seen in the 2001-2003 downturn. A major issue now will be the lack of development starts for delivery in 2011/12, particularly in Mayfair and St James’s, which I see pushing demand into out of core locations.”
 
Bradley Baker, head of central London tenant representation, Knight Frank said: "The office market is beginning to emerge from the shadow of the banking crisis. These market dynamics are offering our tenant / occupier clients some unprecedented opportunities. Large Central London tenants from a range of industries are viewing this as the ideal time to act to secure the best deal. Rents are low by historic standards, and are landlords willing to offer generous incentive packages. Consequently, in the large unit market I see the number of very good quality building options diminishing in the next six months."

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