London office space is back in demand as slump ends

Nick Goodway
29 Sep 2009

The London office property market is set to show its strongest recovery since the collapse of Lehman Brothers as the third quarter ends tomorrow.

Strengthening demand for prime offices indicates that banks and other key financial institutions are already shaking off the effects of the credit crunch and looking to upgrade their premises.

In the clearest sign yet that the recession has ended in London, estate agents today warned that demand for prime offices will start to outstrip supply and rents which have been falling for months are about to start rising again.

“There has been a real sea change in sentiment in the market over the last three months,” said James Young, head of commercial estate agent Cushman & Wakefield's City office. “We have seen a pick up in activity from occupiers. This improving demand, coupled with a constrained supply pipeline beyond next year, means that the bottom of the market for prime space has been reached.”

In the three months to the end of September, take up of office space in the West End, City and Docklands is set to be more than double what it was in the first three months of the year.

A total of 1.86 million square feet — a rise of 64% on the second quarter — was signed up during the last quarter. That is more than double the 716,000 square feet let in the first quarter of the year, but less than the 2.1 million square feet which was taken in the third quarter of 2008 just before the financial crisis broke.

The City of London was the biggest beneficiary of the recent upturn, accounting for 1.35 million square feet of the take up.

That was directly boosted by the collapse of Lehman, when Nomura, the Japanese securities house which took over the failed American bank's London operations, decided to move all its staff into the 540,000 square foot Watermark Place on the banks of the Thames in the City. It will not start paying rent until 2015.

Cushman's West End boss, Guy Taylor, said: “It's been a tenants' market for the last 12 months and landlords have been eager to offer unprecedented rent free periods.

“Over the next few months this imbalance is going to be redressed. In 2010 vacancy levels on prime space are going to fall and rent-free periods will reduce correspondingly.”

Both agents said speculative property development has ended in the capital. In the West End, 2.2 million square feet of speculative space is under construction, down by 670,000 on a year ago.

Cushman also said rents have bottomed in the Square Mile. It forecasts they will start rising again in the second half of 2010.