RESEARCH CENTRAL LONDON Q4 2015

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1 RESEARCH CENTRAL LONDON 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 Carter Jonas 2015

3 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 office rents are per sq ft pa for prime located Grade A space and per sq ft for the upper floors of tower buildings Rents for mid-rise prime located Grade A space in Midtown are per sq ft and per sq ft on the South Bank OVERVIEW Rent, business rates and service charge overheads for office space in established Greater London office locations such as Croydon, Brentford and Uxbridge are typically over 50% lower than the cost of equivalent space in Central London locations such as Victoria, Marylebone, St Paul s, Liverpool Street and Canary Wharf as Carter Jonas latest research shows (see Table 4). Inflation busting increases in rents and business rates costs over the last 5 years, and the erosion of the stock of office buildings in some areas of Central London, as a consequence of redevelopment to higher value residential uses, particularly in the West End and Midtown, is reducing tenant choice and these factors are leading some occupiers to adopt new strategies to reduce their property footprint. Agile working and hot-desking are becoming popular ways to reduce the amount of space required to accommodate an organisation s business operations. Our latest research shows that occupiers are also increasingly questioning the need to retain all of their business operations in Central London. The relocation of back office/administration functions outside Central London, while maintaining a reduced presence in Central London for client facing operations, is becoming a more talked about solution which is intended to limit the negative impact of a full relocation on existing staff commuting patterns, in order to retain key staff. This property strategy is not new and is reminiscent of the wave of relocations from Central London during the mid/late 1980 s to the new business parks that were being developed along the M3 and M4 motorway corridors. The completion of Crossrail in 2018 is likely to catalyse the migration of some rent sensitive tenants from Central London to areas such as Reading and Maidenhead. However, an exodus from Central London s business districts to the Thames Valley on the scale of the 1980 s is, in our opinion, unlikely for several reasons: firstly in a growing, knowledge based, economy, where employers are having to compete to recruit and retain a highly skilled workforce, it is 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 Discounts on landlord s quoting rents are typically 1% to 3% throughout much of the London office market Only three sub-markets now offer refurbished Grade A space at rents below per sq ft pa Docklands, east City fringe and Stratford Rent free periods for 5 year leases up to 11 months (City core) and up to 8 months (West End prime) By Q4 2016, average rents for prime located, midrise, Grade A City and West End office space are anticipated to reach per sq ft and per sq ft respectively and per sq ft and per sq ft in the Midtown and South Bank markets INCREASINGLY TENANTS ARE QUESTIONING THE NEED TO RETAIN ALL OF THEIR BUSINESS FUNCTIONS IN CENTRAL LONDON AS RENTS CONTINUE TO INCREASE IN THE WAKE OF DECLINING VACANCY LEVELS AND TENANT CHOICE. HOWEVER, THE NEED TO ATTRACT AND RETAIN A SKILLED WORKFORCE IS LIKELY TO PREVENT A MASS EXODUS FROM THE CAPITAL Michael Pain, Head of Tenant Advisory Team, Carter Jonas carterjonas.co.uk 3

4 increasingly the case that Central London is the area of the UK with the largest and most diverse pool of talent and, secondly, new business districts on the periphery of Central London are emerging including, for example, Battersea, White City, Old Oak Common, Wembley, Wood Wharf in Docklands and Royal Albert Docks at Silvertown, albeit many will not be ready to receive tenants until the first wave of new office developments complete in 2018/2019. These areas are each undergoing substantial investment in new transport infrastructure and housing stock and will, when complete, offer a very credible alternative to office occupiers that wish to relocate from costly Central London business districts while retaining a presence in London, at lower cost, in locations that will be accessible and that will offer lower cost housing factors that will be key determinants in attracting and retaining the workforce of the future. Until the new developments that are currently under construction in the aforementioned areas are complete, Central London based tenants that wish to expand, or are facing a lease expiry or rent renew, will, for the next couple of years at least, continue to bear the pain of increasing rents and declining choice in the wake of short term supply-side constraints. Since the beginning of the year, record rents continue to be achieved in many of the sub markets that form the Central London office market, including the West End per sq ft at 8 St James s Square, SW1, Midtown per sq ft at 1 Strand, WC2, The City per sq ft at The Leadenhall Building, EC3, East City Fringe per sq ft at The Steward Building, E1 and The South Bank - over per sq ft at The Shard, SE1. Tenants will also face another significant above inflation increase in their property costs when the business rates revaluation comes in to effect in April This document has been published by Carter Jonas Tenant Advisory and Research Teams specifically to assist tenants with budgeting and planning for a lease renewal, rent review or office relocation, in light of the emergence of a less tenant friendly office market, and provides a geographical analysis of the variation in rents and rent free periods throughout Central London, as well as tips on developing a negotiating strategy to secure a rent and rent free period letting package that represents best value. SINCE THE BEGINNING OF THE YEAR, RECORD RENTS CONTINUE TO BE ACHIEVED IN MANY OF THE CENTRAL LONDON OFFICE SUB MARKETS - REFLECTING HISTORICALLY LOW VACANCY LEVELS Source: Carter Jonas Research 4 Carter Jonas 2015

5 RENT DISCOUNTS As the supply of vacant office space continues to fall throughout Central London, landlords are becoming less inclined to offer discounts on quoting rents. However, where office space has been slow to let some landlords may offer discounts of, typically, 1% to 3%. However, in the current rising market there is an increasing tendency for landlords of new and refurbished space not to quote a rent preferring, instead, to provide a guide rent to enable a rent above the guide to be quoted later to prospective tenants that show interest in the office space. RENT FREE PERIODS Rent free periods throughout Central London have shortened considerably since mid 2009, the low point in the office market following the banking crisis, when rent free periods of months for a 5 year lease and for a 10 year lease were typical. Longer rent free periods of months and months on 5 and 10 year leases respectively were commonplace in areas such as Midtown, the City and Docklands where demand was weakest. Since Q rent free periods for leases of between 5 and 10 years have shortened by 1-2 months throughout most parts of Central London, as a direct consequence of supply side constraints, and are now typically as set out in Table 2 overleaf. Where a proposed letting is to incorporate a break option it has, until recently, been possible to negotiate a further rent free period that would typically commence after the break option date. However, due to current market conditions increasing numbers of landlords are now less willing to offer such concessions and it may not therefore be possible to negotiate a break option linked rent free period on the lettings of some buildings. Tenants may therefore wish to consider how important it is to secure the flexibility that a break option offers compared with the financial benefit that a longer rent free period could bring, where a lease without break options is to be granted. OFFICE RENTS Throughout most parts of the Central London office market landlords have increased quoting rents by, typically, 2.50 and 7.50 per sq ft per annum since Q with office space in the City, east City fringe and South Bank recording increases at the higher end of the rental range. Contrast with the super-prime office market in St James s and Mayfair where quoting rents for Grade A space have risen by over per sq ft per annum during the last 12 months. These above inflation rent increases are a direct result of historically low vacancy levels which, in turn, are a consequence of the hiatus in office development activity that occurred during and immediately after the 2008/09 international banking crisis. THROUGHOUT MOST PARTS OF THE CENTRAL LONDON OFFICE MARKET LANDLORDS HAVE INCREASED QUOTING RENTS BY, TYPICALLY, 2.50 AND 7.50 PER SQ FT PER ANNUM SINCE Q The table on the following page provides a geographical summary of typical office rents in each of the Central London office sub-markets as at Q4 2015, assuming that leases for a minimum period of 5 years are to be granted. The upper floors of tower buildings (TB) tend to command rental premiums typically of 20 30% compared with the rents for lower floors, and are shown in brackets. 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 per sq ft pa above those set out in Table 1 and have been excluded to prevent distortion in the data. carterjonas.co.uk 5

6 Table 1 London Office Market Typical Landlord Quoting Rents Q 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 (TB = ) (TB = ) City of London - Secondary locations e.g. Blackfriars, Old Bailey, Barbican, Liverpool Street, Aldgate (TB = ) (TB = ) Fringe City of London Pt EC1, Pt EC2, Pt EC3 & E1 City Fringe North / North West e.g. Farringdon, Clerkenwell, EC1, Finsbury Square & Shoreditch, EC City Fringe East - e.g. Spitalfields, Aldgate East, E1 & Tower Hill, EC South Bank - SE1 Waterloo / Southwark / London Bridge (TB= ) 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 Prime locations e.g. New Street Square, High Holborn, Kingsway) Holborn - Secondary locations e.g. Gray s Inn Road, Theobalds Road Covent Garden / Strand / Charing Cross (TB = ) Shaftesbury Avenue / St Martin s Lane (TB = ) Kingsway / 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. Albermarle Street, St James s 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) - e.g. Fitzrovia / Great Portland Street Soho, Regent Street Haymarket, Lower Regent Street Victoria Westminster, Millbank Knightsbridge Paddington / Bayswater Euston South West / West London, SW3, SW6, W4, W5, W6, W8, W11, W14 Chelsea Kensington / Queensway / Notting Hill Fulham / Hammersmith / West Kensington / Olympia Chiswick Source: Carter Jonas Research 6 Carter Jonas 2015

7 Table 2 Typical Rent Free Periods Q4, 2015 Location Typical Rent Free Period (Months) (lettings over 5,000 sq ft) 5 year lease 10 year lease 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, W West End South Westminster, Victoria, SW South Bank - London Bridge / Southwark / Waterloo, SE West London - Hammersmith, W6, Olympia, W Docklands Canary Wharf, E14 & Stratford, E15 & E Source: Carter Jonas Research carterjonas.co.uk 7

8 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 multitenanted building. Table 3 below provides a summary, by sub-market, of the changes in the costs of prime located new and refitted Grade A office space since Q Table 3 Typical Office Costs - Prime Located New & Refitted Grade A Space Q vs Q ( per sq ft pa) Cost Variable West End City of London Docklands Midtown South Bank City Fringe Rent Business Rates Service Charge Total % Increase % % % % % % 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. 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 = Covent Garden, Strand and Kingsway, WC2 -- South Bank = London Bridge, SE1 4. Docklands service charge costs include the Canary Wharf estate charge, currently 3.08 per sq ft pa. 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 per annum Crossrail levy. Source: Carter Jonas Research 8 Carter Jonas 2015

9 THE OUTLOOK FOR TENANTS DURING THE NEXT 12 MONTHS The continuing imbalance between supply and the demand for office space throughout London is resulting in a shift in the balance of negotiating power away from tenants, which 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 Graph 1 Typical Current and Forecast Average Annual Rents For New and Refitted Grade A Space ( per sq ft pa) The graph illustrates typical current and forecast average annual rents, excluding business rates, building service charge and all other outgoings. Rent per square foot per annum 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. Q Q Q West End Prime West End Secondary Midtown City Prime City Fringe South Bank West London Docklands Stratford Q Q West End Prime West End Secondary Midtown City Prime City Fringe South Bank West London Docklands Stratford Q Geographical Definitions: West End Prime = Mayfair & St James's West End Secondary = Marylebone & Victoria City Prime = Bank / Insurance District West London = Hammersmith Source: Carter Jonas Research City Fringe = Clerkenwell, Shoreditch, Spitalfields & Tower Hill South Bank = London Bridge & Southwark Docklands = Canary Wharf Midtown = Covent Garden & Strand carterjonas.co.uk 9

10 IN SEARCH OF BETTER VALUE OFFICE SPACE The above inflation increases in rents over the last few years, underpinned by the loss of a significant proportion of office space to residential conversion, and the inflation busting business rates increases following the 2010 business rates revaluation, have conspired to catalyse the eastward migration of tenants based in the West End and Midtown to the City, City fringe, Docklands and South Bank where rent and business rates costs are lower. The consequent increase in demand for office space in these locations from migrating tenants, coupled with indigenous demand, has, in turn, fuelled above inflation rent increases and a narrowing of rent free periods in these, hitherto, low cost areas. At the beginning of 2014 there were seven London office sub-markets where it was possible to lease refurbished air conditioned office space for per sq ft per annum, or less. There are now just three sub-markets meeting this criterion: Docklands, Stratford and east City fringe. As a consequence of rising office costs and limited choice, some tenants that are not sensitive to the disruption of existing staff commuting patterns, and potential loss of key staff, are considering Greater London locations such as Croydon, Brentford, Ealing and Uxbridge for the relocation of back office functions, where rent, business rates and service charge costs are appreciably lower see Table 4 below. Table 4 Comparison Of Office Costs, Q4, Central Vs Outer London Locations ( per sq ft pa) Cost Variable Rent Business Rates Service Charge West End City Docklands Hammersmith Total Brentford Uxbridge Ealing Croydon Watford 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 office space above 5,000 sq ft and exclude the value of tenant incentives such as rent free periods 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, Bank, Monument, Liverpool Street -- Docklands Canary Wharf Source: Carter Jonas Research Table 5 Changes In Typical Office Quoting Rents (per sq ft pa) For New/Refitted/Low & Mid Rise/Grade A Space Since Q Location Rent Q4, 2014 Rent Q4, 2015 % Increase City of London Prime - Old Broad Street, EC2 / insurance district, EC3 City of London Secondary -Blackfriars, EC4, Barbican, EC2, Liverpool Street, EC2, Aldgate, EC3 City Fringe North/North West - Farringdon, Clerkenwell, EC1, Finsbury Square, EC % 15.4% % % % % City Fringe East Spitalfields, Aldgate East, E1 & Tower Hill, EC % % Midtown Strand / Covent Garden, WC % % West End Prime - Mayfair, W1 / St James s, SW Up to 20% West End Secondary Marylebone, Fitzrovia/North Oxford Street East, W1 & Victoria SW % % South Bank - London Bridge / Southwark, SE % % West London - Hammersmith, W % % Docklands - Canary Wharf, E Up to 10% Source: Carter Jonas Research 10 Carter Jonas 2015

11 CROSSRAIL IMPACT ON OFFICE DEMAND Crossrail, once operational in late 2018, should assist in relieving the upward pressure on rents in high cost areas, particularly in the W1 postcode area, by improving accessibility and reducing travel times to other districts such as Paddington, Holborn, the City and Docklands, many of which offer newer, better specified, office accommodation, with larger floor plates, typically in excess of 10,000 sq ft, at appreciably lower rental and business rates costs. Crossrail journey times from Bond Street station are, for example, scheduled to be 3 minutes to Paddington, 4 minutes to Farringdon, 7 minutes to Liverpool Street and 13 minutes to Canary Wharf. It is also quite possible that the significantly improved transport links that Crossrail will provide between Central London and the Thames Valley will catalyse the relocation of some rent sensitive Central London occupiers to locations such as Maidenhead (40 minutes from Bond Street) and Reading (52 minutes). Shipping company Maersk is rumoured to be considering a relocation of it s UK HQ from Aldgate East, E1 to Maidenhead and this could be the beginning of a trend, notwithstanding the greater pool of skilled labour that London has to offer and the risk of losing key staff that a relocation is likely to precipitate. THE CITY OF LONDON Landlord s quoting rents for low / mid-rise new and refitted Grade A office space in the City core have risen by, typically, per sq per per annum since Q to per sq ft per annum during Q4 2015, representing an increase of up to 15.4% over the last 12 months. Rents for the upper floors of new tower buildings are now typically above per sq ft per annum and a rent of per sq ft per annum is reported to have been agreed in relation to the letting of the 44th floor of The Leadenhall Building, comprising 6,500 sq ft to shipping brokerage Affinity, which represents a record high City office rent. 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, excluding the upper floors of tower buildings. The variation in rent increases reflects the different supply and demand dynamics of each sub-market: The rents for second hand City office accommodation have similarly increased since Q as vacancy levels reach historic lows throughout all size ranges. 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. 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 which offer young companies the opportunity to lease space on easy in / easy out short term leases / desk sharing agreements which 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 carterjonas.co.uk 11

12 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 for those businesses not seeking start up incubator space preferring, instead, non-serviced, conventional, office space. 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 for conventional office space in the east City fringe, in areas such as Aldgate, Spitalfields and Tower Hill. This migratory trend is reflected in the contrasting rates of rental growth in the north and east City fringes up to 18.3% and over 55.0% respectively since Q New office developments in Aldgate East have set new rental growth benchmarks in the east City fringe. Rents in the early/mid 30 s per sq ft pa were reportedly being achieved on new space at 25 Camperdown Street, E1 a year ago. Contrast with the latest rents that are being agreed at nearby Aldgate Tower where rents for the lower floors are in the early/mid 50 s per sq ft and over 60 per sq ft for upper floors - representing an increase THE DOCKLANDS OFFICE MARKET OFFERS SOME OF THE LOWEST COST ACCOMMODATION IN LONDON - RENTS FOR REFURBISHED AIR CONDITIONED SPACE ARE TYPICALLY PER SQ FT in rents of over 55.0%, albeit Aldgate Tower occupies a superior location. The recent letting of the top three floors of The Steward Building to Cognolink, comprising 17,896 sq ft, has set a new benchmark rent for Spitlefields of per sq ft. DOCKLANDS The Docklands office market has been the last of the eight London office sub-markets to register rental growth reflecting weaker demand and the fact that the area has not suffered from the same supply side constraints as all the other sub-markets. Rents for refurbished Grade A space at Canary Wharf have typically risen by per sq ft per annum since Q4 2014, representing an increase of up to 10%. However, Docklands still retains the distinction of being the only sub-market where it is still possible to negotiate rent free periods of up to 14 months (five year leases) and 26 months (ten year leases). The restoration of rental growth in the Docklands submarket has been brought about by a combination of factors including the gradual reduction in vacancy levels following a pick up in demand and a number of large scale lettings including, for example, the 280,000 sq ft pre-let to Societe Generale at 1 Bank Street, 61,000 sq ft to Truphone at 25 Canada Square and 27,000 sq ft at 10 Upper Bank Street to Mastercard. There has also been an increase in lettings in the Docklands sub-market to non-traditional 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 that offers occupation on a single floor with rent and business rates overheads that are significantly lower. Examples include the relocation of the World Association of Nuclear Operators (previously based in Marylebone, W1) to circa 7,000 sq ft at 25 Canada Square and The Medical Defence Union (formerly situated in Southwark) which has moved to 47,000 sq ft at 1 Canada Square. 12 Carter Jonas 2015

13 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. 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 950,000 sq ft at the proposed redevelopment of Elizabeth House at York Road and up to 800,000 sq ft at the redevelopment of the nearby Shell Centre should address this issue although it is likely to be several years before space will be available to occupy at either development until ongoing town planning issues are resolved. Once operational in late 2018, Crossrail 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. THE SHARD DOMINATES THE SOUTH BANK OFFICE MARKET BOTH IN TERMS OF THE SKYLINE AND IN THE RENTS BEING ACHIEVED - OVER PER SQ FT PA FOR THE HIGHEST FLOORS Recognising that Docklands is no longer just the preserve of global banking, financial and legal services companies the owner of Canary Wharf, Canary Wharf Group, has recently obtained planning consent for its Wood Wharf development, neighbouring Canary Wharf, which will comprise 4.9 million sq ft of residential, retail and leisure uses, including circa 1.9 million sq ft of low / midrise office space, which has been designed specifically to attract a different type of occupier to the Docklands area businesses from the creative, media and technology sectors. Phase one of the construction programme, which will include up to 200,000 sq ft of office space, is scheduled to complete in THE SOUTH BANK The Shard dominates the South Bank office market both in terms of the skyline and in the rents being achieved - over per sq ft pa for the highest floors. The building 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. Recent examples include the relocation of MAYFAIR AND ST JAMES S A rent of over 185 per sq ft per annum has reportedly been achieved on a letting approaching 3,000 sq ft on the top floor of 8 St James s Square, SW1, to the private office of Helly Nahmad, and a floor of 7,900 sq ft has been let at the same building to SG Hambros Bank at a rent understood to be 150 per sq ft. These lettings make London one of the most expensive office locations in the world, alongside Hong Kong and Moscow. While these 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 tenant choice which has been exacerbated by the loss of office floor space to residential conversion. It is no coincidence that the record rents associated with new Grade A office space in prime West End office locations is continuing to fuel the eastward migration of tenants to the City and City fringe recent examples include private equity fund investor Pantheon s relocation from St James s Square to over 17,000 sq ft at 10 Finsbury Square, EC2 and Cognolink s move from Whitfield Street, W1 to 17,896 sq ft at The Steward Building, Spitalfields, E1. VICTORIA, SW1 The new office developments currently under construction in Victoria, including Land Securities mixed use office, residential and restaurant Nova development, comprising 480,000 sq ft offices and Tishman Speyer s Verde building (a re-development of the former Eland House), comprising circa 317,000 sq ft, at Bressenden Place are, by virtue of their scale, transforming the built environment and turning Victoria into a vibrant area in which to live, work and shop. Victoria offers tenants based in areas such as Marylebone, 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. Rents for new Grade A office space on upper floors are typically per sq ft per annum ( per sq ft for lower floors) and business rates are circa per sq ft per annum contrast with Mayfair and St James s where carterjonas.co.uk 13

14 rents for space of equivalent quality are currently per sq ft per annum with correspondingly higher business rates outgoings of per sq ft per annum. 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 on the South Bank and the north and east City fringes, as a new influx of larger international tenants take up residence in the area which has become a particularly popular location for the UK offices of luxury brands including Jimmy Choo, Giorgio Armani, Moet, Burberry, Gucci and Stella McCartney. Victoria is also now well established as a location for energy and financial services companies. Recent lettings include the 56,000 sq ft letting at Land Securities Zig Zag Building to Jupiter Asset Management at a rent reported to be circa 80 per sq ft per annum a new record for the Victoria office market, which has also witnessed some of the largest lettings in the West End during the last 12 months, including 81,000 sq ft at 5 Howick Place to Dong Energy and 90,000 sq ft at 39 Victoria Street to the Parliamentary Estates Directorate. Although its influence has been waning since the global financial crisis, and implementation of the Government s deficit reduction policies, the Parliamentary Estates Directorate letting is a reminder of the continuing importance of the public sector on the Westminster/Victoria office market. 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 of, typically, per sq ft per annum which are appreciably lower than the rents for office space of equivalent quality in locations such as the adjoining Marylebone district ( per sq ft) and other comparable West End locations including Victoria ( per sq ft). Confidence in the area is growing as demonstrated by British Land s decision to press on with the speculative development of 4 Kingdom Street which will comprise 145,200 sq ft when complete in early Crossrail should also give the area a further boost as transport links improve. Crossrail journey times from Paddington will be 3 minutes to Bond Street, 10 minutes to Liverpool Street and 17 minutes to Canary Wharf. SOHO The Crossrail development, which is scheduled to come into service in late 2018, has catalysed the regeneration of a large swathe of east Soho. The demolition works associated with the development of the Tottenham Court Road Crossrail 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 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, near Piccadilly Circus and gaming company King Digital Entertainment has just exchanged contracts to lease the Ampersand Building at Wardour Street, comprising 64,000 sq ft, in it s entirety. 14 Carter Jonas 2015

15 Office rents in King s Cross have risen significantly since Q when rents for new Grade A office space were typically per sq ft per annum - contrast with the most recent lettings where rents of between and just over per sq ft per annum have reportedly been agreed on sub-lettings at 2 Pancras Square - an increase of over 20% - this strong rental growth has prompted the developer of King s Cross Central to proceed with the speculative development of 4 Pancras Square, which will comprise 170,000 sq ft, construction of which is scheduled to complete in Terms have reportedly been agreed to lease the entire building to Universal Music which is relocating from West London. OFFICE RENTS IN KING S CROSS HAVE RISEN TO, TYPICALLY, PER SQ FT SINCE Q WHEN RENTS FOR NEW GRADE A SPACE WERE PER SQ FT PER ANNUM Office rents for refurbished Grade A space in Soho have risen from, typically, per sq ft per annum in mid 2009, the low point in the office market cycle following the global financial crisis, to per sq ft in Q a rise of over 80%, reflecting supply side constraints and the establishment of new benchmark rents associated with new office developments. 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 and 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 from per sq ft pa in Q3, 2010 to per sq ft pa today, representing an increase of 62-70%. KING S CROSS 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 purchase land at King s Cross Central upon which to develop a 1 million sq ft purpose designed office campus is a case in point. The Eurostar hub has also influenced other large scale office occupiers to relocate to the area, including French advertising agency, Havas which has recently taken a pre-let of 160,000 sq ft at 3 Pancras Square. HAMMERSMITH Hammersmith is the capital of the West London office market and, as with the Central London office submarkets, is suffering from a severe shortage of vacant Grade A floor space. Landlord s quoting rents for new and refitted Grade A space have recorded increases of 11% since Q4 2014, reflecting historically low vacancy levels. A guide rent of mid / high s per sq ft pa is being quoted on Development Securities / Scottish Windows 12 Hammersmith Grove, comprising 167,000 sq ft and due for completion during Q while Coca Cola s former London HQ, at 1 Queen Caroline Street, comprising 80,000 sq ft, has been refitted and is being offered to let at a guide rent of per sq ft pa. 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 provide a mixed use retail / office development totalling 255,000 sq ft of which circa 242,000 sq ft will comprise office space. Completion of the development is scheduled for summer EMERGING OFFICE MARKETS New office sub-markets are beginning to emerge as regeneration initiatives, including improved transport infrastructure, make their effects felt in areas such as Battersea/Nine Elms, in south west London and White City, Wembley and Old Oak Common in the west, Canada Water to the south east and Stratford and The Royal Albert Docks in the east. Although it is likely to be up to five years before many of the alternative locations referred to above will be ready to accommodate businesses seeking better value office space, they will, nevertheless, present rent sensitive occupiers with an alternative to cramped and costly Central London office space in the medium term. The International Quarter at Stratford has already attracted Transport for London and the Financial Conduct Authority - each organisation having agreed pre-lets of 250,000 sq ft and 425,000 sq ft respectively. carterjonas.co.uk 15

16 We believe that Stratford will, over the next few years, continue to establish itself as a hub for public sector occupiers due to its low cost and good transport links. At Royal Albert Dock at Silvertown plans to redevelop 35 acres for mixed residential, retail, leisure and commercial uses, including up to 2.5 million sq ft of offices, are underway with completion of the first phase of the development scheduled for The regeneration of the docks will incorporate a Crossrail station, operational in 2018, making it a credible alternative location for Central London office occupiers compared with Docklands and Stratford. In south west London, the Battersea Power Station Development Corporation, which is to develop circa 1.25 million sq ft of office space as part of the power station redevelopment, has recently launched a global campaign to attract foreign businesses to the area. The power station building will incorporate 470,000 sq ft of office space and is scheduled for completion in The Nine Elms Opportunity Area has been given a further boost as a credible alternative to the West End following the US Government s decision to relocate its embassy there - completion of the building is scheduled for Further, the proposed construction of the northern line extension, due for completion in 2020, will provide a direct link to the City of London and West End business districts, which will reinforce the area as a commercial, as well as residential, centre. In West London, White City is beginning to establish NEW, LOWER COST, BUSINESS DISTRICTS IN AREAS INCLUDING BATTERSEA, WHITE CITY, WEMBLEY AND SILVERTOWN ARE BEGINNING TO EMERGE TO RIVAL THE WEST END AND CITY OFFICE MARKETS itself as a vibrant place to live, work and spend leisure time as regeneration initiatives sponsored by the five major local landowners Transport for London, Stanhope, Berkeley Group, Westfield and Imperial College begin to take shape. Stanhope s redevelopment of the BBC Television Centre will incorporate over 500,000 sq ft of office space and Imperial College is planning a 430,000 sq ft research and translation facility while Westfield and Berkeley plan to add to the mix of uses by, respectively, extending the Westfield shopping centre and developing several thousand new homes. The completion of the Crossrail development in 2018 will open up the Old Oak Common area where local landowners have teamed up with developers to put forward proposals to regenerate the area to include up to 24,000 new homes and commercial / office space capable of accommodating up to 55,000 new jobs. Further out, in north West London there are plans by developer Quintain to construct up to 2.25 million sq ft of office space at Wembley. Croydon is also likely to become a viable location for Central London occupiers seeking better value as many of the 1970 s and early 1980 s office buildings are demolished to make way for new office and mixed use retail, residential and office buildings. The Government s Property Unit has reportedly targeted Croydon and Stratford as suitable locations to establish office hubs in order to reduce the footprint of Government departments in Westminster and Victoria where rents have risen by up to 60% since mid the low point in the office market cycle following the banking crisis. The plans to redevelop Euston station, and the development of the HS2 rail hub, together with Sydney and London Properties plans to redevelop its landholdings adjoining the station to create a mixed use commercial and residential development, including over 3 million sq ft of offices, will turn Euston into a new and 16 Carter Jonas 2015

17 vibrant business district capable of offering those tenants based in more traditional West End locations such as Marylebone, Fitzrovia, Soho, Mayfair and St James s with new, better specified, lower cost, office accommodation with good rail links with the rest of the country. 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. 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. 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. office 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 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 carterjonas.co.uk 17

18 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. 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 lease 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 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 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 it s own use 18 Carter Jonas 2015

19 CENTRAL LONDON OFFICE TENANTS WILL CONTINUE TO SHOULDER SIGNFICANTLY ABOVE INFLATION INCREASES IN OFFICE RENTS FOR AT LEAST THE NEXT MONTHS WHEN THE CURRENT WAVE OF OFFICE DEVELOPMENTS WILL COMPLETE AND OFFER TENANTS GREATER CHOICE AND A BETTER BARGAINING POSITION Michael Pain, Head of Tenant Advisory Team, Carter Jonas carterjonas.co.uk 19

20 THE CARTER JONAS TENANT ADVISORY TEAM The Tenant Advisory Team does not provide property consultancy services to landlords. Our tenant representation services include: COMMERCIAL OFFICES London Bath Cambridge Leeds Oxford Office search and relocation management services Relocation budgeting and planning Lease and rent review negotiation Repairs/dilapidations assessment and negotiation Building, air conditioning and passenger lift surveys Business rates analysis and appeal Service charge audit 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 28,000ft 23,000ft Frank Hirth 236 Gray s Inn Road, WC1 UK Payments Administration 2 Thomas More Square, E1 Warner Bros / Shed Media 85 Grays Inn Road, WC1 Nursing & Midwifery Council Two Stratford Place, E20 KEY CONTACTS Michael Pain Partner [email protected] Mark McAlister Partner [email protected] Jeremy Gidman Partner [email protected] Greg Carter Associate Partner [email protected] 17,500ft 16,000ft 15,000ft 11,000ft 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 Ed Caines Associate [email protected] Luke Wild Associate [email protected] Catherine Penman Head of Research [email protected] One Chapel Place, London W1G 0BG carterjonas.co.uk/officesearch The information set out in this document is provided for guidance purposes. We recommend that the advice of an experienced, qualified, property consultant is sought prior to exchanging contracts or making any irreversible strategic lease renewal, rent review or relocation decisions. The contents of this document are protected by copyright and should not, in whole or part, be published or otherwise reproduced, without the prior written approval of Carter Jonas LLP. 20 Carter Jonas 2015