City office rents soar by 12% in a quarter

31 March 2010

Office rents

NB Real Estate, a division of Capita Symonds, has revealed that rents in the City of London soared by 11.8% in the last quarter alone as they finally snapped back after a two and a half year bear market*.

Average rents on City of London Grade A office rents increased from £42.50 per sq ft in Q4 2009 to £47.50 per sq ft.

NB Real Estate points out that this is the biggest quarterly increase in City of London office rents since reliable records began in 1988!

“This is a phenomenal recovery in rents in such a short space of time. It is not normal to see rents jump so dramatically but there has been little that has been normal about the commercial property market or the City of London over the last two years.” comments James Gillett, Director of City Offices at NB Real Estate

“When you consider just how far rents had fallen and how cheap some office space in the City of London had become we shouldn’t be surprised to see such a violent recovery in rents.”

“Landlords and the financial institutions across the City and Docklands are far more optimistic than they have been in years.”

NB Real Estate also points out that City of London rents are still way below their peak of £69.50 per sq ft in Q3 2007. Office rents across London have tumbled since the end of 2007 and hit a floor in Q4 2009 before rocketing in Q1 2010.

Adds James Gillett: “On the way down, through the credit crunch, we saw falls in average City rents of 8.7% in Q4 08, after the collapse of Northern Rock, and a fall of 9.5% in Q1 09. Extreme volatility has been a feature of the last 24 months but we can hope that things start to calm down soon.”

According to NB Real Estate a total of 1.2 million sq ft of space was let in the City of London in Q1 this year – six times more than the 202,000 sq ft of Q1 2009.

The recovery of rents in the Docklands market has been even more dramatic with average achievable rents on Grade A office space increasing by 25% from £30 per sq ft at £37.50 per sq ft. Again average rents in the Docklands are still far below their highs of £50 per sq ft.

Explains James Gillett: “The Docklands office market is a far less liquid market than the City of London market so it doesn’t take too many deals to push average rents one way or another. As with the City of London office market this amazing recovery in rents has to be seen in the context of dramatic fall in rents over the last two years.”

Rents in the West End have also started to recover increasing by 3.8% in the last quarter from £65 per sq ft in Q4 09 to £67.50 in Q1 2010.

NB Real Estate suggests that the comparative lack of exposure that the West End has to the fast recovering investment banking and traditional fund management community explains it slower growth.

James Gillett also points out that the City of London and Docklands have been helped by the extreme shortage of new prime office space being developed.

Says James: “The pipeline of new build office space in the City was just turned off almost completely – that was how fierce the credit crunch was for the property and construction industry. It is partly this shortage of new build prime office that has enabled rents to recover so quickly.”

However, James Gillett warns that although there is an acute shortage of the best quality space there is not the same shortage of lower quality stock.

Concludes James Gillett: “Whilst landlords want to squeeze the very best deals out of the marketplace there is always the risk that they will try to move rents up too far, too fast and drive off potential activity.”

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