London offices ‘shift in favour of tenants’

13th February 2017

London offices have become a tenant’s market in the wake of the Brexit vote as rents plummet and landlords are forced to offer greater incentives to secure lettings. Source: Shutterstock/QQ7 Landlords have been offering longer rent-free periods and more frequent break options since the referendum last June, reveals Carter Jonas research. Rent-free periods have moved out across all submarkets, according to the research. Ten-year leases are now being signed with up to 24 months’ rent free in the City core. In Midtown, rent-free periods have increased from 17 months at this stage last year for a 10-year lease to 22 months. Ten-year leases in prime West End locations are now coming with up to 19 months’ rent free. Office rents predicted Q1 2019 12.4% Expected decrease in Canary Wharf rents £62.50/sq ft Predicted average prime City rent, down from £70/sq ft 7.4% Expected decrease in Southwark rents Source: Carter Jonas Landlords are contending with a double-whammy of loss when the incentives being offered are combined with the fall in rents. “Declining rents, longer rent-free periods, shorter leases and more frequent break options are set to become the hallmark of 2017 as the London office market continues to shift in favour of tenants post Brexit vote,” said Michael Pain, head of the London tenant advisory team at Carter Jonas. The firm predicts that over the next 18 to 24 months, rents in all London office submarkets will decline by between 4.8% to 12.4%. The largest falls are expected in the City, Docklands and Victoria markets, which have marginally higher vacancy levels and are dependent on occupiers seeking large floorplates. The research also found that the all-in costs for occupiers in prime West End locations have fallen by 4.5% over the last 12 months, despite an increase in business rates and service charge costs over the same period. It attributed the fall in costs to the decline in rents for super-prime space with all-in costs to tenants now standing at £181/sq ft compared with £189.50/sq ft a year ago. However, some areas have seen an increase in occupier costs. The Canary Wharf district has witnessed the biggest increase with costs rising 4.4% to £78.30/sq ft, driven by rent rises and inflationary increases in business rates and service charge overheads. Meanwhile, City of London and Midtown office occupancy costs have reached parity for the first time since the 2008-09 banking crisis at around £100/sq ft for mid-rise space. This convergence is explained by an average 1.8% decline in City rents and 1.9% rent increase in Holborn since Q1 2016. City fringe locations such as Shoreditch and Clerkenwell, where all-in costs stand at £93/sq ft, will lose any cost advantage over the City core and Midtown when the 2017 business rates revaluation comes into effect in April.