The onset of recession has accelerated the downturn in Central London’s occupational office market with demand falling 27% in the fourth quarter of last year, according to Jones Lang LaSalle’s latest Central London Report.
The annual total take-up of 10m sq ft was 15% behind 2007 levels while the annual fall in demand across London was 31%, which pushed the market to levels not previously seen since 2005.
Neil Prime, head of office and city agency at Jones Lang LaSalle, said: ‘This downward trend in occupier activity will continue for the foreseeable future until we see some stability in the wider economy. New requirements will emerge but at lower volumes than in recent years and many of these will be a result of structural events, physical obsolescence or consolidation.
‘However, notwithstanding this 2009 could be one of the most challenging years on record for take-up in Central London. Rental decreases are forecast to last until the end of 2010, with occupiers adopting a ‘wait and see’ approach where they can. Thereafter we expect to see rents’ beginning to recover as the oversupply in the market is eroded and vacancy rates begin to reduce.’
Overall demand in the City at the end of the fourth quarter was 7.8m sq ft, a 25% fall on third quarter totals while the annual reduction was 36%.
In the West End total occupier demand fell by 16% to 4.9m sq ft in the fourth quarter, while just under 625,000 sq ft was let representing a 9% decrease on the previous quarter and the weakest final quarter since 2002.
During 2008 active demand in the West End fell by 57% and the annual total take-up of 3.2m sq ft was a 30% reduction on 2007.
JLL predicts that prime headline rents in the City will reach £50/sq ft by the year end, and £47.50/sq ft by the end of 2010. In the West End, prime Mayfair rents fell to £95/sq ft ft at the end of 2008.
This represented a quarterly reduction of 11.6%, the sharpest drop since the 1990s recession.
Investment levels across central London for 2008 fell to £6.3bn, a 66% fall on 2007, while the £949m traded in the final quarter was the weakest since 2002.
In the West End £340m was traded during the fourth quarter; a 47% fall on the third quarter and the annual total of £3bn was a 53% reduction on 2007. Capital transactions in the City totalled £344m in fourth quarter; the weakest quarter since 1996, while the annual £3.1bn total was 67% down on 2007.
Lead director in the City investment team at Jones Lang Lasalle Andrew Hawkins, said: ‘Volumes will remain low over the first half of 2009 although we have already started to see increased competition for prime assets and the first acquisitions by indigenous opportunity funds, always a good sign.
'They will become more active later in the year as reductions in capital values decelerate. However overall, and despite reductions in interest rates, the market will not start to recuperate until the supply of money eases.’