Rents in Central London will be hit harder than the regions – against a background of national falling rents, central London will see the sharpest declines of all by up to 20%.
This year will see developers gearing up for deliveries in 2012 and beyond – with speculative development switched off in the major centres, developers will use 2009 to prepare schemes for the next cycle ie) work up schemes, gain planning consent and take advantage of lower commodity prices (securing steel etc).
Grey-space is set to return – “Grey-space” is the under-current of surplus space which is not openly marketed. During 2009 grey-space will return, however tenants are now more forensic in their property decisions compared to the late 80s and 90s and occupy space more efficiently and with a degree of greater flexibility.
The market will provide rich pickings for the savvy occupier looking towards trading-up at a financially rewarding level.
Landlord flexibility, generous incentives and significant rental reductions in 2009 could see a proportion of the Grade A glut being absorbed, leading to a return to health come mid 2011.
Regional cities are expected to see falling average rents in 2009, but the extent of the fall is much less than the expected adjustment in London. Prime rents will hold up better, especially in larger cities, as the development pipeline switches off.
Lower levels of rental adjustment in regional centres will reflect the less extreme rental growth experienced during the last boom compared to the late 90s (ie regional rents increased by just 10% during 2004-2007 compared to 30% growth in the core London markets.)
During 2008, regional office property markets have held up better than their London counterparts, but activity is still down on the peaks of early 2007. But King Sturge figures for larger deals indicate that some centres have bucked the downward trend for take-up, notably Birmingham and Manchester.
Not surprisingly occupier demand has shifted away from the financial sector over the last 12 months, though the other big sectors, public services and technology have also seen a sharp slowdown overall.
The major deals outside of London were at Snow Hill in Birmingham (250,000sq ft to Wragge and Co at £32.50, also the biggest deal UK-wide), One Reading Central in the Thames Valley (153,000 ft2 to Yell at £28.00) and at the Baltic Business Quarter in Gateshead (110,000 ft2 Npower).
Limited supply had fuelled an upturn in new building across many regional centres over recent years. But grade A space remains short in certain locations and after the completion of significant speculative development this year and early next, very little new supply is now planned.
Out of town markets remained fairly subdued compared with city centres and only prime business parks performing. This weakness in part stems from an over-supply in many areas that stretches back to the technology bubble of the late 1990s.
Tenant surplus “grey space” could be tempered by a more knowledgeable tenant base, lower levels of pre-letting and “super-deal” activity over the last 18-24 months compared to the early 90s – this could lead to less secondary space being released.
Occupiers will also remember the difficulties many had recovering space they let in 2001-02 when the market revived.
For Central London offices King Sturge predicts that in 2009 the market will return to similar levels of 1991-92 supply and demand.
Core prime Central London rents will experience a dramatic correction – with a further 15-20% reduction by year-end 2009 (-33.7% 2008-2009). City rents to return to £45.00ft², and West End set to return to £80.00 ft² (by end-2009) levels last seen in 2004 – levels of rental.
Financial sector contraction and associated industry uncertainty will cause take-up to reduce by at least 25% on 2008 to sub-3 million ft² (2.7million ft²) in the City.
The West End will be subject to heavy hedge fund casualties – take up to total 2million ft.
Incentives for prime space on a ten-year term will move to 24-30 months (same as 1992).
A tenant’s market – Tenants with lease expiries should expect extremely generous terms for re-negotiating on existing space (thus avoiding moving costs and obtaining short-term certainty) or those looking for new premises.
Central London supply to move towards 15 million ft² (last seen in 1991) – including the potential return of tenant-led “grey-space”.
Grey-space totals remain uncertain, but likely to be at least 2 million ft² – some occupiers to maintain their “all under one roof” strategy beyond the credit crunch and may, despite shedding staff, not sublease, just mothball as they will remember the pain and cost of reoccupying last time round.
Construction costs reducing – some developers will start to equip themselves for the next cycle correction.
More innovation expected amongst occupiers, i.e. how they occupy existing space and in acquiring space for the future.
The West End downturn will be short and sharp rather than prolonged and protracted with a more restrained development pipeline over the last three years. When demand does return end-2010 / beginning 2011, there will be a strong bounce back.
The City recovery is set to be slower as there will be a greater proportion of speculative space to be absorbed by a predominantly financial sector occupier base.
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