26 September 2014, When rents, business rates and service charges are combined, the total cost to occupy prime Grade A office space in the West End is now £75.50 to £87.50 per sq ft per annum more expensive than similar space in the City, and office rents throughout Central London are forecast to continue to increase as vacancy levels fall during the next 12 months, according to Carter Jonas’ Central London Office Market Update 2014: Guide to rents and rent free periods, which is published by its Tenant Advisory Team.

Carter Jonas’ research showed:

• Prime West End office rents have risen by up to 7.7% since Q3 2013 to £105.00 - £125.00 per sq ft.  Carter Jonas forecasts that average rents for prime located Grade A West End office space will reach £127.50 per sq ft by Q3 2015
• Prime City rents stand at £55.00 - £65.00 per sq ft, and £67.50 - £77.50 per sq ft per annum for the upper floors of tower buildings.  Carter Jonas forecasts that average rents for prime City office space will reach £65.00 per sq ft and £75.00 per sq ft for tower buildings by Q3 2015
• City Core rent, rates and service charge occupancy costs are typically £82.50 - £100.00 per sq ft per annum for Grade A space compared with £158.00 - £187.50 per sq ft for prime West End space, making West End offices £75.50 - £87.50 per sq ft per annum more expensive, explaining why tenants are migrating east in search of better value, and often better quality, office space

Michael Pain, partner, head of tenant advisory team, Carter Jonas said: “Since the beginning of the year, tenant demand has been increasing. Throughout most parts of London, landlords’ quoting rents have increased typically by between £1.50 - £3.50 per sq ft per annum. The largest increases have been in the South Bank, City secondary and prime West End office markets, reflecting strengthening demand and declining vacancy levels. As the availability of development finance continues to improve, we have seen increasing speculative office development and refurbishment to meet the demand.

“The continued migration of tenants from the West End, especially from high cost locations such as Mayfair, St James’s, Marylebone/North Oxford Street and Soho where rents and business rates costs have risen significantly since mid 2009 to lower cost areas such as the South Bank, City of London and City fringe, has been prevalent. We have seen companies relocate out of the West End to save on total occupancy costs, with law firm Howard Kennedy FSI’s relocation from the West End to 54,500 sq ft at No 1 London Bridge on the South Bank is one of several recent examples of this trend. The West End faces a flight to the City as the total cost to occupy office space gap widens.“In addition, demand for London office space is being supported by tenants that are being displaced following the decision of some landlords to secure a higher rate of return from their property by redevelopment, refurbishment or residential conversion.

“Compared with Q3 2013, there are now just four, out of a total of nine, London office sub-markets capable of offering refurbished, air conditioned, office space, incorporating fully accessible raised floors for data/telecoms cable management, at rents below £35 per sq ft per annum.  These include Stratford, Docklands, east City fringe and west London.”

Additional Carter Jonas research findings:

• Rent free periods for five year leases are up to 11 months for City core and up to 8 months for West End prime
• Discounts on landlords’ quoting rents are typically 2.5-5% throughout much of the London office market Rents for prime located Grade A office space in Midtown are predicted to increase by 7.4% and in the South Bank by 8% by Q3 2015, rising to an average of £72.50 per sq ft and £61.00 per sq ft, respectively
• After a period of nearly six years of falling and, more latterly, static rents, the Docklands office market is witnessing a resurgence in rental growth. Rents for Grade A space at Canary Wharf have increased by up to 6% increase since Q3 2013, reflecting the renewed attraction of the location as rising rents in other sub-markets such as the West End, South Bank, Midtown and City encourage tenants to seek better value elsewhere
• Following the 2012 Olympics, Stratford is emerging as a credible option for tenants seeking affordable office space at rents below £35 per sq ft per annum.  The profile of the area has recently been given a further boost following the decision of the Financial Conduct Authority and Transport for London to lease space of 425,000 sq ft and 250,000 sq ft respectively at Stratford's 'International Quarter'
• The north City fringe, traditionally regarded as a low cost property option for media and the creative industries that have been priced out of areas such as Soho and Covent Garden, is rapidly becoming a 'mature' market. Demand from technology, media and creative businesses has, over the last few years, fuelled the rise in office rents to a point that has significantly reduced the cost advantages of the location. As a consequence, those tenants seeking better value are now focusing their searches in the east City fringe, in areas such as Aldgate, Spitalfields and Tower Hill, where rents for refurbished air conditioned space are typically £27.50 - £39.50 per sq ft per annum, contrast with Clerkenwell and Farringdon, where rents for equivalent quality space are now typically £37.50 - £45.00 per sq ft per annum
• Businesses that are reliant on a highly skilled, young, creative workforce are beginning to buck the traditional trend of moving out of high cost areas in Central London to business parks along the Thames Valley / M4 corridor and are, instead, relocating their businesses closer to the pool of skilled labour in Central London.  Amazon's decision to relocate from Slough to 213,000 sq ft at 60 Holborn Viaduct, EC1, is just one such example of this trend
• By shrinking journey times, Crossrail, when completed in 2019, is likely to reinforce the trend for tenants in high cost Central London locations to relocate to areas offering better value, such as Docklands (13 minutes on Crossrail from Bond Street) and Stratford (15 minutes from Bond Street).  These areas are likely to become increasingly popular with tenants currently based in the West End and Midtown areas, where business rates and rental costs are significantly higher

Michael Pain concluded: “The undersupply of vacant floor space, and limited tenant choice, is encouraging some tenants to start their property searches a good deal earlier than would otherwise be the case, with a sizeable proportion of tenants entering into 'pre-letting' agreements on new and refurbished office space before the buildings are completed and ready for occupation. The letting of 2 New Ludgate, EC4 comprising 193,000 sq ft, to Mizuho is just one of several recent large scale Central London pre-lettings.

“Although not an uncommon feature of the City of London office market, pre-letting is, unusually, now becoming an established trend in the West End office market, where Esteé Lauder and KPMG have recently agreed pre-lets on, respectively, 144,000 sq ft at 1 Fitzroy Place, W1 and 40,000 sq ft at 20 Grosvenor Street, W1, reflecting the limited availability of suitable existing buildings.

“The office environment is increasingly being viewed by occupiers as a fundamentally important element in the battle to attract and retain skilled staff and this trend is translating into better building design.  Landlords are now routinely including features such as shared roof gardens and roof terraces, better levels of natural light with the use of floor to ceiling height glass curtain walling and the provision of secure bike storage, shower facilities and collaborative work space which can be made available for use by all tenants in a multi-tenanted building.”

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