RESEARCH LONDON OFFICE MARKET Q1 2016

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1 RESEARCH LONDON OFFICE MARKET Q Guide to rents and rent free periods carterjonas.co.uk 1

2 LONDON OFFICE LOCATIONS N1 NW1 W11 W2 W1 WC1 WC2 EC1 EC2 EC4 EC3 E1 E14 W8 SE1 W6 W14 SW7 SW3 SW1 GRADES OF OFFICE ACCOMMODATION For marketing purposes office accommodation is generally categorised into Grades which are defined as follows:- Grade A - new or newly refurbished office space where the building specification includes suspended ceilings and fully accessible raised floors for data/telecoms cable management, passenger lift and air conditioning facilities. Grade B - office space that may only incorporate under floor or perimeter trunking for data/telecoms cable management, rather than fully accessible raised floors, and/or air cooling facilities, instead of an air conditioning system that dehumidifies, filters and draws fresh air into the building. Grade B space also tends to be of a generally lower quality building specification. Refitted - office space that is as new, having been completely refitted throughout, to include new fixtures and fittings to the common parts and reception area, new building services including air conditioning and passenger lift facilities, electrical, plumbing and lighting systems, and new raised floors, suspended ceilings and sanitary ware. The specification of works will comply with the latest health and safety legislation and may also include re-cladding the exterior of the building. Refurbished space is defined as office accommodation where the landlord has redecorated and recarpeted the available office space (but not necessarily the common parts) and overhauled, but not renewed, the building services, such as the air conditioning and passenger lift facilities. WEST END Paddington/Kensington/Chelsea Victoria/Westminster Mayfair/St James s Soho/North of Oxford Street Euston/King s Cross (West) MIDTOWN Strand/Covent Garden Bloomsbury Holborn/Fleet Street King s Cross (East) CITY/CITY FRINGE City Core City Fringe (East) City Fringe (North) SOUTH BANK London Bridge/ Southwark/Waterloo DOCKLANDS Canary Wharf Rest of Docklands WEST LONDON Hammersmith/Olympia/ West Kensington 2

3 OFFICE MARKET OVERVIEW The supply pipeline of new office space under construction is gradually recovering, although the development process is unlikely to relieve the upward pressure on rents until Q at the earliest, when the current wave of new developments will start to reach completion. In the meantime, tenants with rent reviews or lease expiries due in the next months are faced with accepting an unwelcome uplift in their rental costs, or introducing hot desking and agile working policies to reduce their property footprint. The alternative is a costly and disruptive relocation to a lower cost area, which may result in the loss of key staff. Carter Jonas latest analysis of Central London office rent, business rates and service charge overheads shows that the cost of occupying new or refitted Grade A office space is up to per sq ft per annum cheaper in the City core (EC3) and per sq ft and per sq ft lower in the City fringe and South Bank sub-markets respectively, compared with prime located space of equivalent specification in the West End (see Table 3). All the sub-markets that form the Central London office market are suffering from an unprecedented under-supply of vacant floor space and a narrowing of rent free periods. This is resulting in limited choice for those tenants that wish to relocate and a weaker bargaining position for those facing rent reviews and lease renewals. The root cause of this phenomenon can be traced back to the international banking and sovereign debt crises which resulted in a development funding drought and collapse in demand. The restoration of economic growth and the consequent resumption of job creation particularly in the technology, media, creative and, more latterly, financial services sectors has translated into a sustained increase in demand for office space, particularly in the City of London and City fringe areas. The West End, Midtown and South Bank office markets have suffered most from supply side constraints. This has been exacerbated by planning policies, aimed at alleviating the London housing shortage, that have encouraged landlords to redevelop office buildings for higher value residential use. These statistics explain the eastward and southward migration of some West End tenants over the last few years to the City, City Fringe and South Bank. However, increased demand has translated into falling vacancy levels, higher rents and a narrowing of rent free periods in these, hitherto, lower cost areas, which is reducing their attractiveness. Only peripheral locations such as Stratford and Docklands are now able to offer refurbished air conditioned space at rents below per psf pa, although this figure does not take into account business rates or service charges. Overleaf is an update by our Tenant Advisory and Research Teams which provides a summary of the activity in each of the London office sub markets. LOW VACANCY LEVELS CONTINUE TO UNDERPIN RENT INCREASES AND A NARROWING OF RENT FREE PERIODS ACROSS THE CENTRAL LONDON OFFICE MARKET. THIS IS A TREND THAT IS LIKELY TO CONTINUE UNTIL THE CURRENT WAVE OF OFFICE DEVELOPMENTS UNDER CONSTRUCTION REACH COMPLETION DURING THE NEXT MONTHS. Michael Pain; Head of Carter Jonas Tenant Advisory Team carterjonas.co.uk 3

4 KEY HIGHLIGHTS CENTRAL LONDON SUB-MARKETS WHICH HAVE SEEN CONSIDERABLE ACTIVITY IN THE LAST QUARTER ARE HIGHLIGHTED BELOW: THE CITY OF LONDON Rents for mid-rise new and refitted Grade A space in the City core have increased by over 14% since Q It is, however, secondary City locations such as St Paul s, Old Bailey and Blackfriars where rental growth has been highest up to 25% over the same period, fuelled by the convergence of those relocating from the City core and the West End with the common aim of securing better value premises. THE CITY FRINGE Quoting rents for new and refitted space in the Old Street area have reached the mid 60 s per sq ft pa and the early 70 s per sq ft pa for the upper floors of high rise buildings. Tenants seeking better value office space are therefore focusing their searches in the east City fringe, in areas such as Aldgate, Spitalfields and Tower Hill and at Stratford and Docklands. Landmark rents have recently been agreed at Aldgate Tower, where engineering design firm Aecom, has taken circa 100,000 sq ft. The development has achieved rents of over 60 per sq ft on the upper floors and mid 50 s per sq ft on the lower floors. The recent letting of the top three floors of the Steward Building to Cognolink, comprising 17,896 sq ft, has set a benchmark rent for Spitalfields of per sq ft. The east City fringe has also just witnessed one of the largest pre-lets in Central London the pre-letting of the entire London Fruit and Wool Exchange at Spitalfields, comprising 275,000 sq ft, to Ashurst Solicitors. THE SOUTH BANK In Q the Shard continues to dominate the South Bank skyline and office rentals market a rent of over 4

5 90.00 per sq ft pa having recently been achieved on Level 26 (15,912 sq ft) to Leonteq. We have also seen an increase in occupiers viewing the South Bank as a low cost alternative to the West End. Those moving into the area include Boodle Hatfield from Mayfair, W1 to 23,600 sq ft at 240 Blackfriars Road and Howard Kennedy from Marylebone, W1 to 54,500 sq ft at 2 London Bridge. VICTORIA Victoria has witnessed one of the largest lettings in the West End since Q with Deutsche Bank taking 92,000 sq ft at Land Securities Zig Zag Building at Victoria Street, where a record rent of over per sq ft per annum has reportedly been agreed on the upper floors. This letting is a rare example of a business relocating from the City to higher cost West End office accommodation - in order to be nearer their private client customer base. PADDINGTON Paddington has recently seen new rent benchmarks being set at Land Securities 20 Eastbourne Terrace where rents of between and per sq ft per annum are reportedly being agreed on lettings of the upper floors. Confidence in the area has continued to grow in the run up to the opening of the Elizabeth Line in 2018, which will significantly improve connectivity. Great Western Developments has announced plans for a 65 storey mixed use tower building at 31 London Street which will incorporate circa 150,000 sq ft of offices, raising the profile of Paddington if planning consent is granted later this year. KING S CROSS Rental growth within the area has prompted the developer of King s Cross Central to proceed with the speculative development of Building R7, comprising 155,000 sq ft, construction of which is scheduled to complete in mid It has been reported that terms have been agreed to pre-let the entire building. THE LONDON OFFICE MARKET IN NUMBERS... City core rent, rates and service charge occupancy costs are typically psf pa compared with per sq ft for prime West End space City core office rents are psf pa for prime located Grade A space and psf pa for the upper floors of tower buildings West End office rents for new and refitted prime located space in Mayfair and St James s are now per sq ft pa and per sq ft pa for space in areas such as Victoria and Fitzrovia Only two sub-markets now offer refurbished Grade A space at rents below psf pa Docklands and Stratford Rent free periods for 5 year leases up to 10 months (City core) and up to 8 months (West End prime) By Q1 2018, average rents for prime located, mid-rise, Grade A City and West End office space are expected to reach per sq ft and psf respectively and psf and psf in the Midtown and South Bank markets FOR MORE INFORMATION ON MARKET TRENDS PLEASE TURN TO OUR GUIDE TO THE CENTRAL LONDON OFFICE SUB-MARKETS ON PAGE 14. carterjonas.co.uk 5

6 IN NUMBERS, Q OFFICE RENTS Table 1 provides a geographical summary of typical landlord quoting office rents in each of the Central London office submarkets as at Q1 2016, assuming that leases for a minimum period of 5 years are to be granted. The upper floors (UF) of tower buildings tend to command rental premiums, typically of 20 30%, compared with the rents for lower floors, and are shown in brackets. Since Q quoting rents have typically increased by per sq ft per annum, albiet it is possible to negotiate rent discounts up to 3%. The geographical variation in rents is reflective of: The different supply and demand dynamics of each sub-market The age, quality and specification of the available office space Proximity to public transport Small office suites of less than 3,000 sq ft tend to command higher pro-rata rents usually psf pa above those set out in Table 1 and have been excluded to prevent distortion in the data. 6

7 Table 1 London Office Market Typical Landlord Quoting Rents Q (Space over 5,000 sq ft) Location Typical Quoting Rent per sq ft per annum Grade A Grade B City of London Pt EC1, Pt EC2, Pt EC3 & Pt EC4 New / Refitted Refurbished Refurbished City of London - Prime locations e.g. Gracechurch Street, Lime Street / Fenchurch Street, Old Broad Street (UF = ) (UF = ) City of London - Secondary locations e.g. Blackfriars, Old Bailey, Barbican, Liverpool Street, Aldgate (UF = ) (UF = ) City of London Fringe Pt EC1, Pt EC2, Pt EC3 & E1 City Fringe North / North West Farringdon, Clerkenwell, EC1, Finsbury Square & Shoreditch, EC City Fringe East - Spitalfields, Aldgate East, E1 & Tower Hill, EC South Bank - SE1 Waterloo / Southwark / London Bridge (UF = ) Docklands - E14 & Stratford E15 & E20 Docklands - Prime locations e.g. Canary Wharf / Heron Quays Docklands - Secondary locations e.g. South Quay, Limeharbour Stratford Midtown - WC1, WC2, NW1, Pt EC1 & Pt EC4 Bloomsbury Holborn Covent Garden / Strand (west) / Charing Cross Shaftesbury Avenue / St Martin s Lane (UF = ) Kingsway / Strand (east) / Aldwych / Fleet Street King s Cross / St Pancras West End - W1, W2 & SW1 Mayfair / St James s - Prime locations e.g. Berkeley Square, St James s Square Mayfair / St James s - Secondary locations e.g. Albemarle Street, Jermyn Street North of Oxford Street (west) - Prime locations e.g. Portman Square, Cavendish Square North of Oxford Street (west) - Secondary locations e.g. Seymour Street, George Street North of Oxford Street (east) - Fitzrovia / Great Portland Street Soho, Regent Street Haymarket, Lower Regent Street Victoria, Westminster (UF = ) Millbank, Pimlico Knightsbridge Paddington / Bayswater (UF = ) Euston South West / West London, SW3, SW6, W4, W5, W6, W8, W11, W14 Chelsea Kensington / Queensway / Notting Hill Fulham / Hammersmith / West Kensington / Olympia Chiswick (UF = Upper Floors) Source: Carter Jonas Research carterjonas.co.uk 7

8 RENT FREE PERIODS Since Q rent free periods for leases of between 5 and 10 years have shortened by 1-2 months throughout many parts of Central London, as a direct consequence of supply side constraints, and are now typically as follows: Table 2 Rent Free Periods By Sub-Market Q1, 2016 Location Typical Rent Free Period Agreed (lettings over 5,000 sq ft) 5 year lease (month) 10 year lease (month) City of London Prime - Old Broad Street, EC2 / insurance district, EC City of London Secondary - Blackfriars, EC4, Barbican, EC2, Liverpool Street, EC2, Aldgate, EC City Fringe North / North West Farringdon, Clerkenwell, EC1 & Shoreditch, EC City Fringe East Spitalfields, Aldgate East, E1 & Tower Hill EC Midtown - Holborn, WC1 / Covent Garden, WC2 / King s Cross, N West End Prime - Mayfair, W1 / St James s, SW West End North Marylebone, Fitzrovia, Soho, W West End South Westminster, Victoria, SW South Bank - London Bridge / Waterloo, SE West London - Hammersmith, W6, Olympia, W Docklands Canary Wharf, E Source: Carter Jonas Research 8

9 COMPARISON OF TOTAL OFFICE COSTS Q VS Q Rent, business rates and building service charge costs are the principal outgoings associated with leasing office space in a multi-tenanted building. Table 3 provides a summary, by sub-market, of the changes in the costs for prime located new and refitted Grade A office space since Q1 2015: Table 3 Typical Headline Office Costs - Prime Located New & Refitted Grade A Space Q vs Q ( per sq ft p.a.) Cost Variable West End City of London Docklands Midtown (North) South Bank City Fringe Rent Business Rates Service Charge Total % Increase 5.6% % 9.4% % 1.0% - 4.4% 3.6% - 5.7% 7.1% - 9.7% 13.2% % Source: Carter Jonas Research Notes: 1. The table summarises typical landlord quoting rents for prime located low and mid-rise new and refitted Grade A space incorporating air conditioning and fully accessible raised floors for data / telecoms cable management, disregarding the value of rent free periods. 2. The rents for the upper floors of tower buildings, which typically command rental premiums of circa 20-30%, have been excluded. 3. Geographical definitions - the prime office locations for each Central London office sub-market set out in the in the table above comprise the following: West End = Mayfair, W1 & St James s, SW1 City of London = Old Broad Street, EC2 & the insurance district, EC3 Docklands = Canary Wharf, E14 Midtown (north) = Holborn, WC1 / EC1 / EC4 and Bloomsbury, WC1 South Bank = London Bridge, SE1 City Fringe = Clerkenwell, EC1, Spitalfields, E1 4. Docklands service charge costs include the Canary Wharf estate charge, currently 3.21 per sq ft p.a. 5. Business rates are based on the rental value of a property and will therefore be higher in areas associated with high rents. The cost estimates include the 0.02 per sq ft p.a. Crossrail levy. carterjonas.co.uk 9

10 IN SEARCH OF BETTER VALUE OFFICE SPACE Table 4 Comparison Of Office Costs, Q1, Central & Greater London & Thames Valley Locations ( per sq ft p.a.) Location Cost Variable Rent Business Rates Service Charge Total West End City Docklands Hammersmith Brentford Uxbridge Ealing Croydon Watford Slough Maidenhead Reading (Town Centre) Source: Carter Jonas Research 1. The rent, business rates and service charge costs in the table are taken from a representative sample of available new and re-fitted Grade A low/mid-rise properties above 5,000 sq ft 2. West End, City and Docklands rent, business rates and service charge costs are based on property samples taken from the following areas: West End Victoria, Marylebone, Fitzrovia/North Oxford Street City St Paul s, Blackfriars, Bank, Monument, Liverpool Street Docklands Canary Wharf 10

11 IN WHICH AREAS OF CENTRAL LONDON HAVE RENTS RISEN THE MOST? The table below provides a geographical summary of the increases in London office rents since Q for new and refitted Grade A office space of above 5,000 sq ft, excluding the upper floors of tower buildings. The variation in rent increases reflects the different supply and demand dynamics of each sub-market: Table 5 Typical Changes In New / Refitted Grade A Office Quoting Rents (per sq ft p.a.) Since Q Location Rent Q1, 2015 Rent Q1, 2016 % Increase City of London Prime - Old Broad Street, EC2 / Insurance District, EC % 14.8% City of London Secondary -Blackfriars, EC4, Barbican, EC2, Liverpool Street, EC2, Aldgate, EC3 City Fringe North/North West - Farringdon, Clerkenwell, EC1, Finsbury Square, EC % % % % City Fringe East Spitalfields, Aldgate East, E1 & Tower Hill, EC % % Midtown (south) Strand / Covent Garden, WC % % Midtown (north) Bloomsbury / Holborn, WC % - 7.1% West End Prime - Mayfair, W1 / St James s, SW % % West End Secondary Marylebone, Fitzrovia/North Oxford Street East, W % % South Bank - London Bridge / Southwark, SE % % West London - Hammersmith, W % % Docklands - Canary Wharf, E Up to 5.3% Source: Carter Jonas Research carterjonas.co.uk 11

12 RENTAL GROWTH PREDICTIONS Based on an analysis of the office development completion pipeline, and predicted patterns of office demand, the Carter Jonas Research Team has prepared a series of rental growth predictions for prime located new and refitted low and mid-rise Grade A office space in each of the London office sub-markets, which are summarised in Graph 1. Graph 1: Typical Current and Forecast Average Annual Quoting Rents For New and Refitted Grade A Space ( per sq ft) Q Q Q Rent per square foot p.a West End Prime West End Secondary Midtown City Prime City Fringe South Bank West London Docklands Stratford Q Q Q West End Prime West End Secondary Midtown City Prime City Fringe South Bank West London Docklands Stratford Geographical Definitions: West End Prime = Mayfair & St James's West End Secondary = Marylebone & Victoria City Prime = Bank / Insurance District West London = Hammersmith City Fringe = Clerkenwell, Shoreditch, Spitalfields & Tower Hill South Bank = London Bridge & Southwark Docklands = Canary Wharf Midtown = Holborn & Bloomsbury 12

13 THE OUTLOOK FOR TENANTS DURING 2016 The persisting imbalance between supply and demand for office space throughout London is underpinning the shift in the balance of negotiating power away from tenants. This is resulting in the following trends: Little or no rent discount on landlord s quoting rents Shorter rent free periods Limited or no break option linked rent free periods An increasing reluctance by some landlords to accept tenant only lease break options instead of agreeing the more usual leasing structure a ten year lease incorporating a five year tenant break option Larger rent deposits where the financial status of the proposed tenant is considered weak carterjonas.co.uk 13

14 SUB-MARKETS THE CITY OF LONDON The strong levels of rental growth in the City over the last couple of years, historically low vacancy levels and the increase in pre-letting activity has encouraged a number of developers to resume speculative office development. Examples include:- 100 Bishopsgate 962,000 sq ft of which 250,000 sq ft has been prelet to the Royal Bank of Canada, completion due Q4, Fenchurch Street, EC3 245,000 sq ft, completion due Q1, Creechurch Place, EC3 273,000 sq ft, completion due Q4, Angel Court, EC2 300,000 sq ft completion Q3, St Mary Axe, EC3 (The Can of Ham) 300,000 sq ft completion due H2, Lime Street, EC3 (The Scalpel) 386,000 sq ft completion due Q4, 2017 Proposed landmark City tower developments include:- 22 Bishopsgate, EC2 to be built on the site of The Pinnacle, construction of which ceased in 2012 planning consent has recently been granted for the 1.3 million sq ft, 62 storey building 1 Undershaft, EC3 proposed 73 storey 960,000 sq ft tower which would replace the existing Aviva Tower and would be the tallest Central London office building planning consent yet to be obtained Office space of sub 5,000 sq ft is in particularly short supply which is forcing many tenants to consider alternative locations including, for example, the north and east City fringes, South Bank and Docklands sub-markets. Some City office tenants are finding themselves competing against West End and Midtown office occupiers that are similarly combing the City fringe and Docklands office markets for space that offers lower rental and business rates overheads. 14

15 THE CITY FRINGE The promotion of the area around Old Street roundabout, rebranded Silicon Roundabout, as a hub for start-up technology companies has been reinforced by the likes of Google setting up co-working / incubator centres in the area offering young companies the opportunity to lease space on easy in / easy out short term leases / desk sharing agreements. These agreements are specifically intended to encourage interaction between businesses and individuals and the sharing of ideas. Boutique investment funds specialising in the tech sector are also setting up offices in the area in order to be closer to their client base. 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, the north City fringe (Clerkenwell, Farringdon and Shoreditch) 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 area. DOCKLANDS The Docklands office market has been the last of the eight London office sub-markets to register rental growth reflecting historically weaker demand and the fact that the area has not suffered from the same supply side constraints as all the other sub-markets. However, Docklands still retains the distinction of being the only sub-market where it is still possible to negotiate rent free periods of circa months (five year leases) and months (ten year leases). 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, THE NORTH CITY FRINGE IS RAPIDLY BECOMING A MATURE MARKET carterjonas.co.uk 15

16 The restoration of rental growth in the Docklands sub-market has been brought about by a number of large scale lettings which have reduced vacancy levels. There has also been an increase in lettings in the Docklands sub-market to nontraditional Docklands office occupiers including, for example, media companies and regulatory bodies that have migrated from the West End, Midtown and South Bank sub-markets in search of Grade A office space. Once operational in late 2018, The Elizabeth Line is likely to reinforce the trend for West End and Midtown occupiers to migrate to Docklands the new transport link will provide direct access to Canary Wharf from Bond Street (13 minutes) and Tottenham Court Road (12 minutes) roughly the same amount of time that it currently takes to travel by tube from Bond Street to Bank. Recognising that Docklands is no longer VICTORIA HAS BECOME A POPULAR LOCATION FOR THE UK OFFICES OF INTERNATIONAL LUXURY BRANDS just the preserve of global banking, financial and legal services companies, the Canary Wharf Group has obtained planning consent for its New Phase development which has been designed specifically to attract a different type of occupier to the Docklands area, including businesses from the creative, media and technology sectors. Phase one of the construction programme is scheduled to complete in mid THE SOUTH BANK The Shard has attracted a varied range of occupiers from the educational, medical and business sectors, many of which represent new entrants to the South Bank office market which is seen by some occupiers, particularly those based in the West End, as a credible lower cost alternative. Under-supply is the overriding theme of the South Bank office market as sites with river frontages that were previously in commercial use have been redeveloped for higher value residential and hotel uses. Waterloo, in particular is starved of much needed new office development although the proposed redevelopment of Elizabeth House at York Road and the redevelopment of the nearby Shell Centre should address this issue. However, it is likely to be several years before space will be available to occupy at either development. MAYFAIR AND ST JAMES S Recent lettings of new, prime located, Grade A space in Mayfair and St James s have set benchmark rents of over per sq ft per annum, making London one of the most expensive office locations in the world, alongside Hong Kong and Moscow. While the lettings of super prime properties are not necessarily representative of the wider West End office market they do, however, illustrate an increasing trend in significantly above inflation rent increases, underpinned by falling vacancy levels and limited choice which has been exacerbated by the loss of office floor space to residential conversion. It is no coincidence that limited availability and the record rents associated with new Grade A office space in prime West End office locations is continuing to fuel the migration of tenants to the South Bank and eastward to the City and City fringe examples include Arma Partners move from Mayfair to The Shard, Rathbone Investment Management s relocation from 1 Curzon Street to 8 Finsbury Circus, EC2 and Cognolink s move from Whitfield Street, W1 to The Steward Building, Spitalfields, E1. VICTORIA The new office developments currently under construction in Victoria, including Land Securities mixed use office, residential and restaurant Nova development, and Tishman Speyer s Verde building are, by virtue of their scale, transforming the built environment and turning Victoria into a vibrant area in which to live, work and shop. The regeneration of Victoria is, however, displacing rent sensitive tenants that typically occupy less than 5,000 sq ft to areas such as Southwark and London Bridge, and the north and east City fringes, as a new influx of larger international tenants take up residence in the area. Victoria has recently become a particularly popular location for the UK offices of luxury brands including Jimmy Choo, Giorgio Armani, Moet, Burberry, Gucci and Stella McCartney. From another perspective, Victoria offers tenants based in areas such as Marylebone, 16

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18 Mayfair and St James s the opportunity to remain in the West End in new, lower cost, buildings that offer larger, more efficient, floors, typically in excess of 10,000 sq ft. PADDINGTON The Paddington office market has for many years been the ugly duckling of the West End office market perceived by many occupiers as having inadequate public transport links with other areas of Central London and a poor array of retail, banking and restaurant facilities to serve the local workforce. However, these factors are reflected in quoting rents which are appreciably lower than the rents for office space of equivalent quality space in locations such as Marylebone and other comparable West End locations, including Victoria. Confidence in the area is growing as demonstrated by British Land s decision to press on with the speculative development of 4 Kingdom Street, comprising 145,200 sq ft, which will be completed in early The Elizabeth Line, once operational at the end of 2018, should also give the area a further boost as transport links improve - journey times from Paddington will be 3 minutes to Bond Street, 10 minutes to Moorgate and 17 minutes to Canary Wharf. SOHO The construction of the Elizabeth Line is catalysing the regeneration of a large swathe of east Soho. The demolition works associated with the development of the Tottenham Court Road Elizabeth Line station have opened up the area and provided developers with a blank canvas enabling new, larger scale, mixed use developments to be constructed. Many of the film companies and advertising agencies that were the hallmark of the Soho office market have migrated to Farringdon, Clerkenwell and Shoreditch having either been priced out of the area or forced to move as a consequence of redevelopment. It is 18

19 the Ampersand Building at Wardour Street. Office rents for refitted Grade A space in Soho have risen by up to 90% from mid-2009, the low point in the office market cycle following the global financial crisis and are now per sq ft, reflecting supply side constraints and the establishment of new benchmark rents associated with new office developments. BLOOMSBURY & HOLBORN Once regarded as drab and unattractive areas, associated with the publishing industry and legal profession, Bloomsbury and Holborn are now fashionable, established, business districts. A series of office redevelopments and refurbishments including 1 Kingsway, 10 Bloomsbury Way and 40 Chancery Lane, that offer high quality space at significant rent discounts to the West End have transformed the area. These buildings have catalysed the migration of media, creative and technology companies to the area, including Saatchi and Saatchi, Warner Bros and Skype resulting in a radically different and vibrant tenant mix. The education sector is also an important driver of demand and is competing against business users for office space in the under-supplied Bloomsbury and Holborn office markets. In mid-2015 King s College leased 300,000 sq ft at Bush House, and its sister buildings forming the Aldwych Quarter, and the London School of Economics has, over recent years, acquired office space in and around Lincoln s Inn. THE EDUCATION SECTOR IS ALSO AN IMPORTANT DRIVER OF DEMAND AND IS COMPETING AGAINST BUSINESS USERS FOR OFFICE SPACE IN THE UNDER-SUPPLIED BLOOMSBURY AND HOLBORN OFFICE MARKETS inevitable that the tenant mix in Soho will continue to change over the next few years as new, larger scale, office developments attract occupiers from the financial, business services and technology and telecoms sectors as they shift eastward from their more traditional locations, including Marylebone, Mayfair and St James s, in search of better value. This trend has already established itself following the lettings to Telefonica and Generation Investment Management at The Crown Estates Air W1 office development, located in the south west quadrant of Soho, and gaming company King Digital Entertainment has recently taken a lease of However, rents and business rate costs for new / refitted Grade A space remain competitive compared with West End space located in areas such as Victoria, Marylebone and Fitzrovia. COVENT GARDEN / STRAND The character of the Covent Garden / Strand office market has changed considerably over the last 5 years as many of the occupiers from the media and creative industries have been displaced by businesses from the financial, professional services and energy sectors that have migrated from Mayfair and St James s, in search of better value office accommodation. This influx of new occupiers, with larger rental budgets, has resulted in rents for prime located refurbished mid-rise Grade A space increasing by up to 71% to per sq ft per annum since mid carterjonas.co.uk 19

20 KING S CROSS Office rents in King s Cross have risen significantly since Q4 2014, by over 20% in some instances. King s Cross is now firmly established as a credible alternative office location to rival the West End, City and Midtown areas such as Holborn and Covent Garden. The 67 acre mixed use King s Cross Central development is transforming the area into a vibrant and attractive place to work, live and shop. The redevelopment of King s Cross / St Pancras station, incorporating the Eurostar hub, has also reinforced King s Cross as a credible alternative office location with sufficient land to accommodate large-scale office requirements where build to suit options can be offered. Google s decision to relocate from several buildings in the West End and Midtown and purchase land at King s Cross Central upon which to develop an office campus is a case in point. The Eurostar hub has also influenced other large scale office occupiers to relocate to the area, including Universal Music which has taken a pre-let at 4 Pancras Square, comprising 170,000 sq ft. HAMMERSMITH Hammersmith is the capital of the West London office market and, as with the Central London office sub-markets, it is suffering from a severe shortage of vacant floor space. Landlord s quoting rents for new and comprehensively refurbished Grade A office space have recorded increases of up to 17.0% since Q1 2015, reflecting historically low vacancy levels. Prompted by rising rents and falling vacancy levels, Legal and General has recently obtained planning consent to redevelop Bechtel House, 245 Hammersmith Road, which will comprise a mixed use retail / office development of 255,000 sq ft. Completion of the development is scheduled for summer LANDLORD S QUOTING RENTS FOR NEW AND COMPREHENSIVELY REFURBISHED GRADE A OFFICE SPACE HAVE RECORDED INCREASES OF UP TO 17% AT HAMMERSMITH SINCE Q1,

21 TO SUPPORT BUSINESS GROWTH MINIMISING OFFICE COSTS Property costs are typically a business second largest overhead after staff costs. Because of the rapid inflation in office costs over the last few years brought on, principally, by unprecedently low vacancy levels and the 2010 business rates revaluation - increasing numbers of office occupiers are migrating to lower cost areas. Many are using their relocation as a catalyst for change in their working practices and use of technology in order to minimise their property footprint and reduce operating costs. As a consequence, a number of trends are emerging among London based office users, including: choosing buildings that have been designed to accommodate a higher occupancy density traditionally office buildings have been constructed to accommodate one person per 107 sq ft / 10 sqm but improvements in building design and technology, particularly with regard to air conditioning capacity, coupled with IT hardware that generates less heat, is enabling developers to create buildings capable of accommodating up to 1 person per 87 sq ft / 8 sqm. hot desking the sharing of workstations between staff that are not permanently office based. This office occupancy strategy is particularly relevant to management consultancies and sales organisations that employ high numbers of project/field based staff. agile /remote working increasing numbers of organisations are exploiting the freedom to operate remotely from the office which has been conferred by advances in mobile data / telecoms technology, including the use of laptops, smartphones and tablet computers, which has enabled some occupiers to reduce their property footprint. smaller desk sizes ten years ago desks were typically mm wide. Advances in flat screen technology and the greater use of laptops and tablet computers, coupled with electronic, rather than hard copy, filing means that today s office workforce can work as efficiently with smaller desks of mm. carterjonas.co.uk 21

22 cloud technology the use of cloud computing technology negates the need to develop dedicated data / telecoms rooms, incorporating expensive supplementary air conditioning systems, and also enables savings to be made in the quantum of floor space to be leased. fitting out costs are typically one of the largest items of capital expenditure associated with an office move. There are several ways in which these costs can be mitigated, including: leasing space that is being marketed with the previous tenant s fitting out works in situ although some adaptation may be required, it is often possible to make significant savings by modifying a previous tenant s fit out making use of HMRC tax reliefs including Investment and Capital Allowances using tax efficient finance leasing to fund the fitting out works ISSUES TO ADDRESS WHEN NEGOTIATING A LEASE Whether negotiating a new lease on existing premises or relocating to alternative premises, we recommend that the key issues set out below are addressed in the lease negotiations in order to secure best value lease terms. negotiations become protracted. financial components rent discount rent free period and break option linked rent free periods landlord capital contributions towards any refurbishment / fitting out works that the tenant may wish to undertake limiting exposure to increases in annual running and future exit costs by including: a service charge cap a rent review cap - where the LL is seeking to include a rent review a schedule of condition to record the condition of the office space before the lease is granted to limit future repairing and dilapidations costs provisions that limit the scope of the tenant s repairing obligations building flexibility into the tenancy by addressing: the length of lease to be granted the timing and frequency of tenant only lease break options the minimum period of notice required to exercise the break option(s) the scope of the pre-conditions to be complied with in order to exercise the break option security of tenure IT IS GOOD PRACTICE TO START THE NEGOTIATIONS AT LEAST 18 MONTHS BEFORE A TENANCY EXPIRES, PARTICULARLY IN A MARKET WHERE RENTS ARE LIKELY TO CONTINUE RISING When embarking on a lease renewal, and to strengthen the tenant s bargaining position, it is good practice to start the negotiations at least 18 months before the tenancy expires, particularly in a market where rents are likely to continue rising. Adopting this timeframe will allow sufficient time to effect an orderly relocation if terms for a new lease cannot be agreed, as well as conferring on the tenant a stronger bargaining position and the ability to use the credible threat of relocating if the lease renewal exclude landlord break options where landlord break options are to be included, ensure that they can only be exercised on meeting certain pre-conditions, for example, when the landlord wishes to redevelop as evidenced by placing a demolition or building contract negotiate a lease that is to be granted within the security of tenure and compensation provisions of the 1954 Landlord and Tenant Act, which confers rights on tenants of business premises to a new lease and compensation in the event that the landlord wishes to redevelop the property or occupy for its own use 22

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24 THE CARTER JONAS TENANT ADVISORY TEAM Our tenant representation services include: Lease and rent review negotiation Office search and relocation management services Relocation budgeting and planning Repairs/dilapidations assessment and negotiation Building, air conditioning and passenger lift surveys Business rates analysis and appeal Service charge audit 36 OFFICES ACROSS THE COUNTRY, INCLUDING 12 IN CENTRAL LONDON COMMERCIAL OFFICES London Bath Cambridge Leeds Oxford For more data on the Central London office market, office availability, rents and rent free periods and information on budgeting and planning for a lease renewal, rent review or office relocation please contact one of the team. CASE STUDIES Lease negotiations and relocations 10,000 sq ft+ 37,000ft 33,000ft Frank Hirth 236 Gray s Inn Road, WC1 UK Payments Administration 2 Thomas More Square, E1 KEY CONTACTS Michael Pain Partner [email protected] Jeremy Gidman Partner [email protected] 28,000ft 23,000ft 17,500ft 16,000ft 15,000ft 11,000ft Warner Bros / Shed Media 85 Grays Inn Road, WC1 Nursing & Midwifery Council Two Stratford Place, E20 Hackett Limited The Clove Building, SE1 Circle Housing Two Pancras Square, N1 Hitachi Rail Europe 40 Holborn Viaduct, EC1 Salamanca Group 50 Berkeley Street, W1 Greg Carter Associate Partner [email protected] Ed Caines Associate [email protected] Luke Wild Associate [email protected] Darren Yates Head of Research [email protected] One Chapel Place, London W1G 0BG carterjonas.co.uk/officesearch Follow us on Twitter, LinkedIn and Instagram Carter Jonas The information given in this publication is believed to be correct at the time of going to press. We do not however accept any liability for any decisions taken following this report. We recommend that professional advice is taken.