2001:a space oddity

Contrary to what, on the face of it, are alarming statistics, agents believe there is just 12 months’ supply of City office space. By Stacey Meadwell Working in what is perhaps the world’s most dynamic property market, City agents are not renowned for their sense of pragmatism. But ask them for their views on a potential oversupply of office space in the Square Mile – for instance, could there be a repeat of the boom and bust scenario? – and you are met with unanimous rejection of the notion. The very statistics that have been said to signify impending danger for the City are those being used by agents to portray a stable market that is hovering around equilibrium. A rerun of a pre- or post-1989 scenario is not part of the conversation. Statistics compiled by the London Office Database and published in Estates Gazette (9 October), show that, although there is planning permission for some 865,939m2 (9.3m sq ft) of speculative space, the actual amount of space coming out of the ground is far from alarming. John Forrester of DTZ Debenham Thorpe says that it is important to consider just how much space is actually under construction. “Only 2m sq ft of speculative accommodation can be delivered in the City between 2000 and 2001. This is approximately 33% less than the long-term historic needs, disregarding the record take-up in 1997 and 1998.” One year’s supply of office space remaining Dr Karen Sieracki, head of research at City agent BH2, puts the vacancy rates into perspective: “Office vacancy levels for the City market reduced to 6.8% in the third quarter, with grade-A space showing 3.2%. This equates to just over one year’s supply of take-up.” One explanation as to why there is so much space with planning permission is offered by Kevin Chapman of Nelson Bakewell. He believes City planners are beginning to panic about occupiers locating outside the City and want to let it be known that planning has been relaxed on big buildings. The developers with large sites are getting planning permission while they can, he says. “The big schemes being talked about are years away.” Likewise, Bill Peach of Richard Ellis St Quintin comments that many developers are levelling their sites so that in the event of a prelet construction can get under way quickly. British Land is doing just that. The developer is building a “raft” over Liverpool Street station – to be called 201 Bishopsgate – on which 65,030m2 (700,000 sq ft) of office space could be accommodated. Despite recent reports that a speculative scheme is on the cards, a spokesman for British Land says that it still has a prelet very much in mind: “You have to get yourself in a position so you can build quickly. You have to make it known in the market that you are ready to build.” An oversupply of office space would only arise if a large proportion of the sites with planning permission (see table) were to be built speculatively. However, many of these schemes have not received funding and this is holding development back. Catherine Rees of CB Hillier Parker says that developers are under pressure from investors to secure prelets. REStQ’s Peach adds that current expectations of low rental growth are also deterring banks from lending on speculative schemes. The big companies like British Land are in a position to fund their own schemes. But there is still a reluctance to proceed without a prelet. British Land has another site which could accommodate 60,385m2 (650,000 sq ft) at Plantation Place, Fenchurch Street, EC3. Its spokesman comments: “I don’t think many developers would build big chunks of space speculatively.” For the bigger developers, it may well be fear of a lack of demand that is holding them back. Rees explains: “Developers are worried about demand – the prelet levels of 1997 have not been achieved. Oversupply is not a worry, it is demand that is more of a problem.” According BH2’s Sieracki: “Preletting activity has been non-existent for 1999.” Indeed, Daiwa shocked the market by announcing that it would not be taking up its prelet at 88 Wood Street, EC2. The 23,412m2 (252,000 sq ft) purpose-built office was completed in September. Sentiment is another factor mentioned by agents – that is: how the market is perceived, based on knowledge and “guestimates” of what will happen. DTZ Debenham Thorpe’s Andrew Lowe says: “There is not a shortage of land and planning consents or people who want to build, but the market is short of sentiment and the appetite to build speculatively.” Stable market means no pressure However, he adds that the static land values are a sign of a stable market, which allows developers and occupiers alike to take their time in deciding what to do. Meanwhile, Drivers Jonas’s Matthew Elliot points to his firm’s crane survey (see p124), which shows that, of the speculatively built space that started construction this year, most of it is in small chunks. Only four schemes are over 4,645m2 (50,000 sq ft). REStQ’s Peach feels that, without rapid rental growth, only one or two developers will press ahead with large-scale speculative schemes. Most bets seem to be on Land Securities making a decision to build out Blossoms Inn, Gresham Street, EC2, whereas Paternoster Square is perceived as being a case of waiting for a prelet. However, until cement mixers actually arrive on site, the market can only speculate – using statistics and a “feel” for the future trends. Taking into consideration what is already under construction, agents believe that, far from being an oversupply, the opposite could be true. Weatherall Green & Smith’s Stuart Knight comments: “Very few schemes have gone on site this year. In late 2001-early 2002, there will be hardly any space completing.” The London Office Database figures support this view (see graph) They show that the last chunks of speculative space expected to complete in 2001 amount to just 22,826m2 (245,700 sq ft). It is for this reason that developer Hammerson is proposing to go ahead with a speculative scheme. Work is due to start on 280 Bishopsgate early next year, which will provide 23,225m2 (250,000 sq ft) when it completes at the end of 2001. Predicted shortage no problem Peter Cole, development director at Hammerson, says: “We believe we can take advantage of the shortage of supply in 2001.” Hammerson is in a position to fund its own scheme. Cole believes that it is good for the market for banks and investors to keep a tight lid on the money they lend. The oversupply of office space in the early 1990s has been blamed on the ease with which banks lent money on speculative schemes. Developer Delancey is also due to start on site at 1 New Fetter Lane in January with a 9,100m2 (98,000 sq ft) scheme, but it is chasing a particular market. New Fetter Lane is in an area of the City dominated by the legal profession and, according to Jeremy Trice of Morgan Pepper, joint agent with Healey & Baker, a number of solicitors are looking for new space. “There is very little supply coming through and Delancey has taken the view that, by starting the development, it will be ahead of the game,” he enthuses. The view of the market is that a repeat of the boom-and-bust scenario of the late 1980s-early 1990s is not, for the foreseeable future, on the cards. The picture in many agents’ eyes is, in fact, a relatively stable market with supply and demand in balance. The only perceived danger would be a crash on Wall Street, which could hit the City hard. Current City availability There is little space being built Under construction Pre-marketing New-build 50,119m2 495,812m2 Refurbished 9,416m2 4,237m2 Total 59,536m2 500,049m2 Source: London Office Database Projected City office completions (Q4 1999-Q4 2001) Very little space will complete in 2001 Source: London Office Database Sites in the City with planning permission Most schemes are awaiting prelets before starting construction Building name Address Planning status Size (m2) Postcode Developer Agent Sites with planning permission and actively looking for prelet Courtney House (Building 1) Paternoster Square Permission 22,366 EC4 Mitsubishi DTZ Debenham Thorpe Laud House (Building 2) Paternoster Square Permission 24,909 EC4 Mitsubishi DTZ Debenham Thorpe Grindal House (Building 3) Paternoster Square Permission 12,672 EC4 Mitsubishi DTZ Debenham Thorpe Bancroft House (Building 5) Paternoster Square Permission 2,554 EC4 Mitsubishi DTZ Debenham Thorpe Building 6 Paternoster Square Permission 553 EC4 Mitsubishi DTZ Debenham Thorpe Fleet Building 70 Farringdon Street Permission 44,313 EC4 BT/Development Securities Richard Ellis St Quintin N/a 140 Queen Victoria Street Permission 32,980 EC4 BT Agent not appointed Plaisterers Court 1 London Wall Permission 18,580 EC2 Hammerson/Kajima Morgan Pepper Plantation Place 31-35 Fenchurch Street Permission 93,420 EC3 British Land CB Hillier Parker Spitalfields Market 280 Bishopsgate Permission 18,580 EC2 Hammerson BH2/Richard Ellis St Quintin Times Square 160-162 Queen Victoria Street Permission 32,980 EC4 Louis Dreyfus & Sableknight DTZ Debenham Thorpe/ Jones Lang LaSalle Sites with planning permission not yet on the market N/a 11-14 Moorfield Highwalk Permission 38,000 EC2 Hammerson Lazard Bros occupies – lease expires 2008 N/a 12 Throgmorton Avenue Permission 20,903 EC2 NatWest Current permission expires 2001 Mondial House 91-95 Upper Thames Street Permission 31,586 EC4 BT On hold – BT rationalising portfolio Newspaper House 8-16 Great New Street Permission 33,444 EC4 Norwich Union LandSec eyeing the site as part of larger development St Vedast House 150 Cheapside Permission 18,208 EC2 St Martins Property Co No plans to redevelop – and Empire House KIO occupies 8,361m2 Source: London Office Database Docklands crane survey – autumn 1999 There are many opportunities for development, but little actual space available Ref Address Developer/tenant Size (m2) Completion Refurbishment completed in past six months 1 2 South Quay Plaza CIT 13,403 Mid-1999 2 Wyndham House Wyndham Investments 19,506 Oct 1999 3 6-9 Harbour Exchange Capital & Provident 24,720 Sept 1999 Under construction 4 17 Columbus Courtyard Canary Wharf/CSFB 18,394 1999 5 20 Columbus Courtyard Canary Wharf/CSFB 25,548 1999 6 33 Canada Square Canary Wharf/Citibank 52,024 1999 7 Canada Square Retail Canary Wharf/Various 6,500 2000 8 15 Westferry Circus Canary Wharf/Unlet 16,274 2000 9 8-16 Canada Square Canary Wharf/HSBC 102,191 2002 10 25 Canada Square Canary Wharf/Citigroup (55,741) 113,339 2002 Future development 11 DS1 (Canada Square) Canary Wharf 46,264 TBA 12 DS3 (Canada Square) Canary Wharf 60,385 TBA 13 DS4 (Canada Square) Canary Wharf 45,986 TBA 14 DS8 Retail (Canada Square) Canary Wharf 18,116 TBA 15 HQ1 (Canary Wharf South) Canary Wharf 26,291 TBA 16 HQ2 (Canary Wharf South) Canary Wharf 86,398 TBA 17 HQ3 (Canary Wharf South) Canary Wharf 27,870 TBA 18 HQ4/5 (Canary Wharf South) Canary Wharf 102,191 TBA 19 BP1 (Churchill Place) Canary Wharf 36,231 TBA 20 BP2 (Churchill Place) Canary Wharf 15,239 TBA 21 BP3 (Churchill Place) Canary Wharf 22,761 TBA 22 1 Millharbour Ballymore/Fidelity 67,000 2002+ 23 South Point Carnegie Holdings 26,600 2002+ 24 World Trade Centre Capital & Provident 33,300 2001+ 25 Arrowhead Quay Ballymore 25,000 2002+ 26 Soverign House Ladkarn 60,000 2002+ NB: All future Canary Wharf sites are subject to change and alteration both in terms of design and area Source: Knight Frank City of London crane survey – space recently completed or under construction – autumn 1999 About 65% of office space included in the Crane survey is already prelet *Ref Address Developer/funder Size (m2) Completion Completed between January and October 99 1 Centennium House, 100 Lower Thames Street Hammerson UK Properties 5,853 Mar 2 Equitable House, 47 King William Street Greycoat 3,437 Apr 3 Telephone House, 2 Temple Ave Land Securities 2,973 Jun 4 88 Leadenhall Street Bahagia Investments 9,290 Jun 5 Alder Castle, 1 Noble Street Argent 8,826 Jul 6 Broadgate West, 9 Appold Street Broadgate West 21,182 Jul 7 71 Fenchurch Street Lloyd’s Register of Shipping 23,505 Jul 8 4 Bouverie Street The Folkstone Estate 1,672 Aug 9 131 Finsbury Pavement Pidemco 6,503 Aug 10 6 St Andrew Street Helical Bar 4,181 Sep 11 Procession House, Ludgate Hill Heron 8,733 Sep 12 Augustine House, Austin Friars Scottish Life 2,648 Sep 13 88 Wood Street Daiwa 23,412 Sep 14 1 Cornhill/80 Lombard Street Nexus Ltd 3,809 Sep 15 8-10 Mansion House Place Helical Bar 3,252 Sep 16 288 Bishopgate Mercury Asset Management 2,323 Oct Under construction between January and October 99 17 66 Queen Victoria Street Heron 10,684 Nov 18 130 Wood Street Greycoat 5,388 Nov 19 100 Wood Street Helical Bar/Despa 13,936 Dec 20 21 Lombard Street NatWest Group 10,870 Dec 21 Fleet Place House, 11 Holborn Viaduct Heron 8,361 Jan 00 22 25 Cannon Street Pembrook Real Estate 10,591 Mar 00 23 8-10 Old Jewry The Grocers’ Co 5,574 Mar 00 24 7 Newgate Street AXA Sun Life 7,154 Mar 00 25 City Point, Ropemaker Street Wates 50,168 Mar 00 26 16 Old Bailey Hammerson UK 8,640 May 00 27 King Edward Building, King Edward Street Merrill Lynch 55,742 Jun 01 27 Barrington House, Gresham Street CGI 24,527 Jul 00 29 Christchurch Court, Paternoster Square Pillar/Prudential 26,013 Dec 00 30 Atlantic House, Holborn Viaduct Prudential 22,111 Dec 00 31 120 Fleet Street Itochu 32,516 Dec 00 32 Woolgate House, Coleman Street MEPC 32,516 Mar 01 33 25 Chiswell Street Helical Bar/Despa 24,155 Nov 01 New schemes started between January and October 99 34 15-17 King Street City & Provincial 2,044 Feb 00 35 30-34 New Bridge Street Scottish Widows 2,230 May 00 36 11 Philpot Lane Taylor Woodrow 2,787 Jun 00 37 50 Finsbury Square Standard Life 12,078 Jul 00 38 168 Fenchurch Street Marks & Spencer 8,919 Dec 00 39 Blackfriars Court, Pilgrim Street Developmt Securities 10,219 Dec 00 Source: Drivers Jonas *Only buildings over 1,600m2 are shown