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In June 2007 an occupier could choose to lease a suite of offices in the West End, let’s say at a rather good address in Mayfair, possibly not too far from Berkeley Square and handy for all the smart restaurants and bars. Business was flourishing then, some five and a half years ago, in a booming economy, with finance readily available especially where property was concerned. Over the five years previous to this the FT 100 Share Index had risen as much as 70%. The rent you agreed at that time of £95 per square foot for a five-year lease seemed a bit high but your agent negotiated a three-month rent-free period; anyway it only represented a modest percentage of annual office costs.
Roll forward, say two and a half years to mid 2009 , and you are of course under the terms of your original lease still paying £95 per square foot, but you hear that a similar office suite on the floor above you has just been let at £45 per square foot with a twelve-month rent-free period. The aforementioned index has fallen 30%,
Roll forward again to January 2013; thankfully your five-year lease at £95 per square foot has expired but you are holding over hoping that your agent will be negotiating a lease renewal closer to £45 per square foot.
But no! Your agent informs you that the floor below has just been let on a five-year lease at £95 per square foot with a three-month rent-free period and the floor above is under offer at £105 per square foot. The FT 100 Share index is back over 6,000.
Confusing? The UK and world economy remains in recession or at best precarious, weighed down by enormous debt, well-known high street retailers are going bankrupt and the vacancy rate for offices outside of Central London are reaching an all-time high. What’s going on?
Well, if you think back to those economics lessons you may remember the concept of flexible demand and inflexible supply. Offices in the West End, especially in Mayfair, represent this inflexible supply and in the last five years demand for offices in Mayfair has been very flexible. Five years ago demand for offices in Mayfair was sky high with companies growing exponentially and desiring the most prestigious addresses, which in London are near Berkeley Square.
However, naturally, during the couple of years following the recession companies in general were not interested in moving, thus demand fell and consequently lower rents were achieved. Demand has been steadily rising over the last couple of years in the West End and has driven rents right back up.
London has its own economy and is doing rather well at it. Prospective tenants will be disheartened to hear that, in contrast to the rest of the UK, the probability is that Central London offices rents are going to rise further in 2013.
Morgan Pryce is a specialist tenant acquisition agent with offices in Oxford Circus and the City. Morgan Pryce specialises in search, negotiation and project management and works exclusively for tenants.