Many locations have seen headline office rents hold steady for the better part of two years. However, rent free periods have been moving out in order to sustain this, according to the latest London office bulleting from international real estate agency Cluttons.
They now appear to be at a critical tipping point, level, which is driving some landlords to consider alternative incentives, such as delayed completions, the report says.
According to Cluttons’ head of research, Faisal Durrani, it is a well-documented fact that net effective rents have been declining ever since the Brexit referendum last summer. ‘We’re now at a critical point in the market, where a combination of subdued demand and lease incentives at extraordinary levels mean that headline rents have started to give way,’ he added.
Cluttons cites the intensification of uncertainty around the outcome of the Brexit talks and the UK seemingly missing out on the rising level of global trade as the chief reasons behind the deterioration in rents.
‘Many firms remain nervous about making a long term commitment to more space, choosing either flexible overflow space or to reconfigure within their existing office. The exception to this are the serviced office and TMT sectors, who have helped transactional levels in the West End to surpass four million square feet already this year, which is paradoxical to the falling rental conditions,’ said Freddie Pritchard-Smith, head of commercial office agency at Cluttons.
Cluttons believes that the quieter conditions suggest that landlords will need to demonstrate greater flexibility in order to attract new tenants, whilst also preparing for what appears to be the start of a period of a softening in office rents across London.
‘For developers, the challenge is more acute, especially where space is being developed speculatively. While pre-lets are arguably the strongest section of the market, occupier expectations and demands continue to evolve, putting greater pressure on the specification, amenities and design of new buildings to attract them to their scheme, which inevitably will have cost implications,’ added Pritchard-Smith.
While rents have edged lower in some locations, implied capital values have also followed suit in these areas, according to Cluttons, although in real terms the declines are marginal at best, with locations such as Canary Wharf and the City Core down £15 per square foot, softening slightly in the third quarter of 2017.
Durrani added that overall investment activity has continued to surge, in part supporting stability in capital values, which are being underpinned by the sheer weight of capital entering the market.
Central London recorded £3.08 billion worth of deals during the third quarter of 2017 compared to £1.7 billion during the second quarter, according to PropertyData.
Source: Propety Wire