Take-up in the central London office market was only 213,675 sq m (2.3m sq ft) in the first half of 2003 according to the latest research from FPDSavills. This is 50% below the long-term trend, and 27% lower than in 1992 which was the worst year of the last cycle.
While there are signs that business confidence is starting to improve, which may lead to increased activity in the second half of the year, it is unlikely to have an effect on the supply-side of the equation. Although the central London vacancy rate has not hit its early 1990Ã¢â¬â¢s peak of 17%, it continues to rise steadily, and now stands at 11.5%. The oversupply situation is most extreme in the City of London with 1.47m sq m (13.7m sq ft) of offices available which equates to a vacancy rate of 16.9%.
Unsurprisingly, the low demand and increasing supply has led to further rental falls over the first six months of this year. While deal evidence is scarce, FPDSavills estimates that prime rents have fallen by 7% this year, on the back of the 20% falls last year.
The two key questions surrounding the central London office market in the near future are; when will business confidence recover and how much speculative office space is under construction?
FPDSavills predicts that, outside the banking sector, confidence will start to recover in the second half of 2003, leading to an increase in demand in early 2004 with a strong recovery in the private services and the public sectors Ã¢â¬" both of which will benefit the West End.
On the supply-side, 2003 is the peak of the development cycle in the West End, while in the City, this will not occur until 2005.
FPDSavillsÃ¢â¬â¢ analysis of previous cycles indicates that prime rents generally start to recover as vacancy rates peak, thus FPDSavills is forecasting that West End rents will show some positive growth next year, and the City of London will not recover until late 2005.
Mat Oakley, head of commercial research at FPDSavills, comments: Ã¢â¬ÅThere is still a way to go before we reach the bottom of this cycle. While there are some indications that confidence and demand may be improving, the key indicators to watch are on the supply-side. Until the development cycle peaks, and the month-on-month increase in supply slows, we see no prospect of positive rental growth in the central London office market.Ã¢â¬Â
Mat Oakley, FPDSavills
+44 (0)20 7409 8781
Merilla Colovic, FPDSavills press office
+44 (0)20 7409 8940