City of London - Occupier Snapshot

5th March 2008

"Property prices are falling as oversupply is again apparent". Sadly, this is a case of perception over reality when it comes to looking for offices in the City of London today.

The occupational property market cannot react as swiftly as sentiment or the capital markets and the reality is, if you are looking for City offices today, then only one in every 17 buildings is available, despite the plethora of cranes on the skyline. Currently, in the City of London there is only 200,000 sq ft of completed new space on the market with a further 2.9 million sq ft of speculative build available for letting due to be completed in 2008.

On average, take-up of new buildings, which equates to approximately 40% of the total, is 2.1 million sq ft per annum. In theory therefore, by the end of 2008 the choice should be greater. However, this will, only push vacancy rates up from the current 6% towards 10% - one in every 10 buildings.

This change is not sufficient to dramatically reduce rents.

Indeed, with headline rents for prime Grade A buildings in the West End at £140 per sq ft and in Midtown £80 per sq ft, the City at £65 per sq ft represents good value. No longer is the health of the City office market due entirely to financial and banking sectors. Indeed the largest active requirements currently are from lawyers including Stephenson Harwood (100,000 sq ft), Pinsent Mason (120,000 sq ft), Dewey & LeBoeufs (120,000 sq ft) and Orrick Herrington (100,000 sq ft). Although the latent demand from Banks remands strong with the likes of Bank of Tokyo, Mitsubishi, Merrill and Deutsche all considering their options, and Standard Bank searching for 100,000 sq ft this year.

The events of the last few months (the housing market in USA and Northern Rock here) will have dented confidence for the time being. But with the 2012 Olympics, full employment, a readily available labour supply and low inflation, the prospects for the City office market should remain good. Those developers and investors speculatively building offices and retail schemes that are workable and flexible enough for today's occupiers, should be able to let their buildings, albeit not with the returns seen over the last few years.