Overall activity remains well below the peaks of 2000/01 and, with take-up for the year to date under 7.5 million sq.ft., the full year result is set to be well below the ten-year average of 11.8 million sq.ft.
Occupier market remains fragile: the slight increase in take-up recorded in Q3 owed much to the 750,000 sq. ft. pre-let to Allen & Overy at Bishopâ€™s Square in the City, without which take-up would have been akin to the far lower level recorded in Q1.
Availability picture is mixed
While the volume of available space has continued to rise, an increase of only 6% in Q3 compares favourably with the 13% rise in Q2, and suggests that the very pronounced expansion in availability seen in recent quarters may be slowing. In particular, the West End market saw no increase in availability this quarter, and the 6.5% rise in City availability is well below the 16% rise recorded in Q2. We hold to the view that the City office market remains most susceptible to the current turbulence in financial markets and the further potential disposals of secondhand space by companies consolidating or relocating within central London.
Development pipeline shrinks
The total volume of space under construction fell again this quarter, reflecting an increase in completions and a very sharp decline in new development starts. With a tighter development funding environment, we expect new starts to be further constrained in coming quarters, despite which those existing schemes scheduled for completion next year will require some rebound in occupier demand.
Weak economy continues to stifle rents
With UK growth set to be well below trend this year occupiers remain reluctant to assume additional rental liabilities. As a consequence central London office rents fell by an average of 3% in Q3, or around 10% in year on year terms, and are expected to remain under downward pressure in the short term.
Investment activity defies fragile occupational market
Despite the continuing weakness in occupational markets, interest in the central London investment market remains high, driven by a combination of low interest rates and a very uncertain performance outlook for other asset types. Central London investment volumes remained firm in Q3, and central London office yields fell in response to this substantial weight of money. There are, however, some signs of an easing in the downward pressure on yields, as rental growth prospects recede.
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(source: Richard Ellis)