Space glut hits City office rents

LONDON'S office property market is turning into a tale of two cities, with West End rents up to twice those in the Square Mile, according to the latest findings from commercial property agents.

The City still has more than double the amount of empty office space compared with the West End, leaving tenants in a strong position to bargain for cheap deals in the financial district roughly east of Farringdon.

Tenants should have to pay only around £45 per square foot for topnotch buildings in the City this year, against up to £90 for equivalent offices between Bond Street and Piccadilly, agent King Sturge reports.

Talk of a rapid pick-up in the financial services industry at the start of 2004 has yet to become a reality, with many banks at best simply taking off the market City space they had already leased but could not fill, rather than signing up for more offices.

According to property agent Cushman & Wakefield, empty City office space now tallies almost 18m squared feet, around 13% of available space, up from 12.7% a year ago.

King Sturge predicts no significant rental growth in the City until 2006, meaning tenants are being offered up to three-year rent-free deals on signing long leases.

In the West End, Cushman records that empty space fell to 7.4m sq ft at the end of 2004 from 9.1m the year before, down from 9.8% to 7.9%.

Last year's West End rental growth will continue this year, King Sturge predicts. Landlords have benefited from demand from a revitalised media industry and a new breed of Mayfair-based hedge funds.

They have also profited from the lack of new buildings, whereas the City is still suffering from a glut of speculative development at the end of the Nineties.

Landlords Helical Bar and Morley Fund Management obtained rents of more than £80 per sq ft at 40 Berkeley Square from buyout firm Blackstone and fund manager Caxton.

In the City, landlords have fared best by holding out for single tenants to take whole blocks, rather than letting buildings on a floor-by-floor basis.

Last November, Land Securities singed Dresdner Kleinwort Wasserstein to its 30 Gresham Street block - a 396,000 sq ft site empty since completion in December 2003 - at around £43 per sq ft on a 24-year lease.

Gherkin points up problem

SWISS Re's 'Erotic Gherkin' tower at 30 St Mary Axe epitomises an oversupplied City office market. The 40-floor building has won design plaudits but is still nearly half empty, eight months after opening for business.

Last month, Hypo Real Estate signed up for the 21st floor, totalling 16,500 square feet, paying around £43 a square foot against the £60 Swiss Re hoped for when it began marketing in spring 2003. Landlords who have come down on price on pre-lets have fared better. In November, British Land secured around £45 per sq ft from insurance group Willis for a 25-year lease on yet-to-be-built towers at 51 Lime Street covering 465,000 sq ft.