Cost Of Office Space In London Set To Rise In 2020

Providing that there is no hard Brexit, office rents in London, particularly the West End, Midtown and South Bank markets, are set to rise during the second half of 2020, according to a new analysis report.

By contrast, rental growth in the capital is likely to be deferred until the second half 2021, due to higher vacancy in that sub-market, says the report from national property consultancy Carter Jonas.

Rents for new and refitted Grade A space in most parts of the West End, Midtown, South Bank, City and City fringe are forecast to rise by, typically, £2.50 per square foot per annum over the two year period to the second quarter of 2021, driven by low vacancy and stronger than anticipated post-Brexit vote occupier demand.

In areas of acute low vacancy, such as Mayfair, Soho, Fitzrovia, Southwark and King’s Cross the increase in rents is likely to be nearer to £5 per square foot per annum over the same period.

“Occupiers that are considering a relocation to new or refitted office space, should be aware that the window of opportunity to secure competitive lease terms is narrowing given the likelihood that landlords will begin pushing up advertised rents in many parts of London next year as vacancy, and choice, declines,” said Michael Pain, head of the tenant representation team at Carter Jonas

The report points out that since the second quarter of 2018, rent, business rates and service charge occupancy costs have increased by over 3% in Farringdon, Canary Wharf, Holborn and Mayfair, due, principally, to the construction of new Grade A developments that have set new rent benchmarks in these sub-markets. By contrast, occupancy costs across many parts of the London office market have increased by less than 1% over the same period.

The disparity in real estate costs is continuing to fuel the eastward migration of occupiers to the City and City fringe sub-markets. In the City, occupancy costs for new Grade A office space are currently around £70 per square foot per annum lower compared with space of equivalent quality located in Mayfair and St James’s, where occupancy costs are typically £173.20 per square foot per annum.

In the City fringe sub-markets, Stratford and Canary Wharf continue to offer the best value for new and refitted Grade A space with occupancy costs of, typically, £71.10 and £84.50 per square foot per annum, respectively.

“Occupiers not already based at Stratford and Canary Wharf have, historically, tended to be resistant to moving to these sub-markets because of their peripheral location. However, the development of Elizabeth Line stations at Stratford and Canary Wharf is changing occupiers’ perception of these business districts, a factor that has spurred Canary Wharf Group to press on with the speculative first phase of Wood Wharf,” Pain explained.

Across many parts of the London office market, rent free periods have remained broadly static during the 12 months to the second quarter of 2019. However, Carter Jonas’ research indicates that, barring no hard Brexit, rent free periods could decline by two to three months from their current levels, for a five to 10 year lease, by the fourth quarter of 2020, especially in the Midtown, South Bank and West End sub-markets, where vacancy is particularly low.

“Notwithstanding the uncertainty associated with Brexit, demand for new and refitted Grade A floor space throughout London continues to be resilient. The shift in workforce demographics, as the proportion of ‘Gen Z’s’ and ‘Millennials’ in the employment market increases, is driving the demand for new and refitted Grade A space. Employers realise that to attract and retain the best they must offer a smart, vibrant and engaging working environment,” said Dan Francis, head of research at Carter Jonas.