Rents and tenant demand in the City of London are ‘slip, sliding away’ with the market running the risk of oversupply, says US investment bank Lehman Brothers.
In its weekly note titled ‘Gherkins in a pickle - City rents heading south?’ it said most companies’ expansion plans in the City ‘were now reversing… and there is now evidence of the first rental decreases since 2004’.
It said: ‘The City of London runs the risk of short-term over-supply (again!), in our view. As in past cycles, with a gestation period of around three years, those last to the development party run the risk of delivering into a market devoid of demand.’
New build party
Lehman estimates there is around 5.5m sq ft of new build office space that is uncommitted and being delivered over the next two years. Jones Lang LaSalle reports 7.3m sq ft is under construction for this year and next with CB Richard Ellis reporting 6.3m sq ft until 2010, but not all is speculative.
The bank said there is a prospect of further rental declines of 15% in the city during this year and next widening the imbalance between the City and West End markets with the West End proving more defensive.
City in a pickle
It said: ‘The Centre for Economics and Business Research forecasts a further 10,000 city jobs losses over the next quarter. Applying our rough rule of thumb at 150sqft per person, another 1.5m sq ft will have to be accounted for – the equivalent of three ‘Gherkin’ buildings to add to the 11 coming from uncommitted construction.’
Such an overflow will impact on rents and Lehmans said space in six months is likely to be worth less than space now as pressure increases. It said: ‘Incentives are being extended and effective rents already look to have fallen 4% on smaller units according to JLL with larger lettings likely to fall further. We believe those with mandates in three to five years are better served waiting in the current market.’