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.
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
Expected decrease in Canary Wharf
Predicted average prime City
rent, down from £70/sq ft
Expected decrease in Southwark
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.