4:50PM King Sturge report says vacancy rates could rise while rents fall

A warning has been issued on London’s office market for the second time this month. Property agent King Sturge has said the capital is facing the threat of an over-supply of offices.

The agent said that while the market is currently healthy, if present levels of development activity keep pace, 2008 could see soaring vacancy rates and falling rents. There would be a negative knock-on effect for construction consultants as building projects ground to a halt or were postponed.

King Sturge said in its city offices report for the third quarter that city vacancy rates were falling - now standing at 7.7%. Supply of city offices also fell in the quarter by 2.6% to 493,050m2 currently available. The report judged that “speculative development for 2007 and even 2008 looks reasonable”. However, it warned that “developments beyond 2008 are causing anxiety… Alarm bells are already ringing across many a landlord’s boardroom with fears that the delivery of this volume of new development could cause rising vacancy rates, stalling rental growth and crippling their investment returns".

Anthony Duggan, associate partner, said: “With a minimal volume of new starts recorded in the latest survey the development pipeline for 2007 and 2008 looks very tight. At worst the volume of space under construction looks manageable; at best there will be a real shortage of new space over the next two years.”

The warning echoed a report from rival agent Drivers Jonas, which QS News reported on last week. Drivers Jonas said that many of London’s “extravagant tower schemes” would be shelved. The message came in a survey by the firm, which found that development activity has dropped in central London during the past quarter.

Drivers Jonas’ Q3 2006 Central London Crane Survey found there had been few speculative starts in the West End. Great Portland Estate and Crown Estate had been particularly busy but their activity, the survey said, “only served to rebalance the completions recorded over the last six months”.

City of London offices:
Rents in 2006 up 17%
Vacancy rates down to 7.7%
Supply fell in Q3 by 2.6%
Total London office space that could be brought to market within 4 years: 12.2 million sq ft

Source

QS News