Why are London office rents increasing in such tough times?

This month saw another increase in office rents in the country’s capital. Offices in Clerkenwell and Shoreditch were the biggest movers again this month as prime office space saw rents increase from £37.50 in Shoreditch to £40 per square foot. Clerkenwell experienced the same sort of increase; £42.50 to £45 per square foot. So how are rents being pushed up, against this backdrop of such economic gloom and European uncertainty? 

Some factors that affect the rental values are common across the country. However, performance is also affected by local supply and demand, as determined by local economic conditions. Shoreditch presents the perfect example of this. Due to increasingly rising rents in Soho many media firms have seen themselves priced out of the market, having to move further east to Shoreditch; this has seen a significant spike in rents in this area. This huge demand for a certain specification of space has led to rents increasing by almost £15 per square foot over the last two years. However, as demand increases for media-type space in the area, demand for conventional office space has remained very much static; the combination of poor demand and great supply for conventional office space has seen rents forced lower. At present the Shoreditch market is very much a two-tier market between conventional office space and media “warehouse” space. Rents in the area range from as little as £22 per square foot to £40 per square foot, showing the enormous difference in supply and demand between these two kinds of property.

Another factor affecting rental values across the capital is the ease with which overseas investors can access the market. The level of access an overseas investor has to the market will determine how attractive a particular market is to global investors. For example, the less attractive a local market is, the less global demand there will be – thus, performance will be reduced. At present, with the ongoing European uncertainty and economic gloom, foreign investors see the London property market as an investment hub. This has led to 60% of investment into London coming from foreign investors. With this high level of investment from abroad entering the market, rents have been able to remain high and even increase in some areas, whilst rents in other regions of the country continue to fall.

The opportunity to increase rents is also important. This can be achieved either through improving the property or as a result of external changes in the market that affect demand for the property and therefore the rent it can command. For example, increased economic activity might bolster demand for the property in a particular location, which might in turn push up rents or, conversely, the development of newer alternative property nearby might decrease that demand.

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.