The city office market
Review of 2000
2000 was an exceptional year for the City office market. Huge amounts of the available space
were snapped up, while recent developer caution meant there was very little coming through to
replenish supply. As a result, rents shot up, and investors piled in.
• Availability plummeted from 547,000m² to 180,000m²
• Take-up soared to 657,000m²
• Headline rents increased to £646m²
• £4bn investment transactions completed
Preview of 2001
2001 will see the supply shortage at its most acute, only to be relieved by pre-lets or quick
refurbishments. Provided demand holds up – and there is every indication that it will – rents will
be pushed up even further in 2001. King Sturge predict that the City will be one of the best-
performing markets in 2001.
• Supply will squeeze even tighter – vacancy rates will be virtually nil
• Demand will remain strong – London’ economy will continue to outperform
• The supply/demand balance will push rents even higher
• Clear investment strategies
725,000m² under At the end of 2000 there was 725,000m² of office space under
construction construction in the City. By far the majority of this space, 87%, was
either started on a pre-let basis or has been let during construction.
..but only 55,800m² There is now only 95,400m² of speculative space undergoing
speculative construction or refurbishment, and of this, only 55,800m² is due to
completions in 2001 s
complete this year. This represents about one month’ supply. Four
schemes of over 5,000m² are due to complete in 2001, plus two slightly
smaller ones, and a handful of smaller developments and
Speculative completions due in 2001:
100 Leadenhall Street, EC3 (refurbishment) 11,624m²
70 Gracechurch Street, EC3 9,184m²
1 St John’ Lane, EC1 8,554m²
1 Plough Place, EC4 5,036m²
Crystal Court, St John’ Square, EC1 4,709m²
Blackfriars Court, EC4 (remaining space) 4,528m²
Limited starts in There are few definite construction starts planned for this year - at the
2001 moment 29 Gresham Street, EC2 (12,500m²) is due to start, and there
are five or six other possibilities.
Some direct owner There has been little commitment recently to speculative development
development funding for major schemes. However, this year several owners,
particularly institutions, have started work on their own sites: Standard
Life (10 Gresham Street, Juxon House); Henderson (1 Plough Place,
Moor House – with Greycoat); Asticus (29 Gresham Street)
..but generally, Overall, in 2001 as in 2000, development will be held back by the
caution caution of owners and funders. There is no shortage of sites - there is
still a total of 1,119,600m² of sites with planning permission. Many of
these are very large, and four (Broadgate Plaza, Plantation Place,
Paternoster Square and Times Square) are cleared or being cleared in
preparation for a quick roll-out.
180,000m² available Availability fell to 180,000m² during the last quarter of 2000. The
reduction in supply during 2000 has been dramatic – there is now only
a third as much space available as at the end of 1999.
2.5% vacancy rate 180,000m² represents only 2.5% of City stock – the lowest rate for
Limited new, large 42,200m² of space came to the market this quarter, but only 10,500m²
space of this was new or top quality second-hand space. Most of the space
released, and all of the good quality space, was under 2,000m² in size.
3 months supply left There is now a severe imbalance of supply and demand – 180,000m² of
space available equates to only just over 3 months’worth of take-up.
Little on the Very little space of any size is expected to reach the market in 2001.
horizon New space is severely constrained by the development pipeline. Some
second-hand space will be released as a result of mergers and moves to
new headquarters, but only the smaller properties are likely to come
straight on to the market. Space released by banks like HSBC and RBS
will take some time to come to the market, partly because of the
logistics of moving, and because the larger properties will be re-worked
in some way before marketing.
Off-market Perhaps oddly, given the restrictions on large units, it will be small
occupiers who may find it more difficult to move quickly in 2001 (large
solutions? occupiers still have the option of taking a pre-let). We expect to see a
rise in the number of deals done off-market.
The supply/demand balance
657,300m² let this 174,800m² was let in the last quarter of 2000, bringing take-up for the
year year to 657,300m², twice as high as each of the last two years. Interest
in large properties resurfaced this year – over 20% of this year’ s
lettings were of properties over 10,000m².
Key lettings this quarter:
Property Size Tenant
Holborn Place, EC1 30,600 Sainsbury
280 Bishopsgate, EC2 24,184 Royal Bank of Scotland
Premier Place, EC2 20,940 Royal Bank of Scotland
88 Wood Street, EC2 8,200m² Compaq
1 Great St Helen’ EC3 5,200m² Global Marine Systems
25 Cannon Street, EC4 5,200m² Shook Hardy & Bacon
Role of fringe While much of the space let this quarter was accounted for by
traditional finance-related occupiers, the Sainsbury letting at Holborn
Place, EC1 this quarter and Globix’ acquisition of 1 Oliver’ Yard,s
EC1 earlier in the year indicate a developing role for the City fringes –
housing major occupiers interested in central London at a lower cost.
Widening tenant s
The range of occupiers in the City is widening – this year’ major
base lettings included tenants from the legal and TMT sectors as well as the
traditional banking, insurance and finance.
Non-financial tenants taking more than 5,000m² in 2000:
Law TMT Other
Brobeck Hale & Dorr Bloombergs Commission for
Freshfields Compaq Health Improvement
Gouldens Global Crossing Customs & Excise
Shook Hardy & Globix Global Marine
Sullivan & Cromwell Sainsbury
Demand still strong There is considerably more demand to come. In particular, there are a
number of law firms, both British and American, with immediate and
longer-term requirements. Some of the key firms are Allen & Overy,
Addleshaw Booth, Paisner & Co, DJ Freeman (who abandoned plans to
take 1 St John’ Lane), Macfarlanes, Vinson Elkins and White & Case.
Headline rents have risen to £646m² (£60ft²). This level has now been
achieved both on new space – at 88 Wood Street, EC2 – and on second-
£646m² achieved at hand space. RR Donnelley paid £646m² at 55 Bishopsgate, EC2 in
55 Bishopsgate December.
...and why The latter deal is an important market indicator for several reasons – the
acceptability of second-hand space, albeit of top quality and excellent
location, the sheer shortage of space (the occupier had very few
options) and the increased importance of location and quality to what
have traditionally been seen as City "support" services – RR Donnelley
is primarily a printer of IPO and other financial documentation.
Minimal rent-free Rent-free periods are now between 3-6 months on leases of 10 years
periods and longer, and have fallen to as little as 1-3 months on five-year
More growth in Continuing short supply, coupled with buoyant demand, will produce
2000 good rental growth in 2001. At the time of writing, one City property
was under offer at £673m² (£62.50ft²), although the deal under
negotiation is for a short lease.
..especially for Rental pressure is undeniably there, but, given the shortage of supply, it
second-hand space? may be difficult to find the deals to prove substantially higher rents this
year. The shortage of new supply will also have a knock-on effect on
rents for good-quality second-hand space, and much of the visible
rental growth may be in this area.
Record investment £1.90bn was invested in the City market between October and
December 2000, taking total investment for the year to £4.03bn. The
total value of City office investment has increased more than fourfold
in five years.
Portfolio Total investment in 2000 was boosted by three key portfolio sales:
Vendor Purchaser Price
Wates Prudential £246m
British Land WestLB £311m
MEPC Portfolio Holdings £150m
Irish and German 70% of the purchasers in 2000 were domestic. Both UK funds and
purchasers property companies were very active in the market, though on balance
over the year the funds were net investors and the companies
disinvestors. However, £544m was also spent by overseas investors,
notably Irish private investors, and some of the German bank-managed
Japanese vendors UK owners also made up most of the vendors in 2000, although there
were a number of notable sales, totalling £356m, by Japanese
developers and institutions:
60 Victoria Embankment, EC4 Sumitomo
55 Bishopsgate, EC2 Kumagai Gumi
24 Chiswell Street, EC1 Shimizu
Vintners Place (part-interest), Sumitomo
Old Change House, EC4 Nisho Iwai
24 King William Street, EC4 Nippon Life
Yields at 6.25% Prime investment yields in the City now stand at 6.25-6.5%.
Continuing interest 2001 should see continued investor interest in this market. A currency
realignment could bring a resurgence of overseas interest, though from
Europe rather than Asia.
Two strategies There will be investor opportunities at both ends of the market in 2001.
There are asset management opportunities, which require effort and
carry void risk, but the supply-side case is still very strong. There are
also higher yielding longer-term passive investments, which look good
value at current yield levels, and might provide the opportunity to sell
on if overseas investors return to the market.
Q4 2000 – summary data
000m² Dec 99 Mar 00 Jun 00 Sep 00 Dec 00
Construction – speculative 200.80 243.55 260.54 215.61 95.37
Construction – pre-let 504.42 606.07 636.28 636.31 629.70
Planning permission 1,144.30 1,407.21 1,109.04 952.08 1,119.59
000m² Dec 99 Mar 00 Jun 00 Sep 00 Dec 00
Total space available 547.12 486.11 372.81 207.83 179.95
000m² Dec 99 Mar 00 Jun 00 Sep 00 Dec 00
Total space taken up 113.54 100.53 173.05 208.99 174.77
Dec 99 Mar 00 Jun 00 Sep 00 Dec 00
£m² 511 511 619 619 646
£ft² 47.50 47.50 57.50 57.50 60.00
£m 1996 1997 1998 1999 2000
Total invested 1,373 2,065 3,077 2,158 4,029
For further information on issues relating to this report, please contact the following:
Partner in Charge Peter Joslin email@example.com
City Research Helen Morris firstname.lastname@example.org
City Investment James Beckham email@example.com
City Agency Mark Bourne firstname.lastname@example.org