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City office mart seen riding out forecast job cuts

But if redundancies are higher, supply overhang could lead to recession: players

(LONDON) The City of London is set to lose enough jobs next year to empty its landmark ‘Gherkin’ skyscraper twice over, putting pressure on the office market in this global financial hub.

The industry expects prices and rents to fall, but consistent tenant demand suggests that the market in the capital’s main financial district will survive such a slowdown. Deeper job cuts, though, could spell trouble.

Britain’s Centre for Economics and Business Research (CEBR) foresees 6,500 London financial service sector redundancies in 2008. Based on industry estimates of between 100 and 150 square feet per employee, available office space could surge by as much as 975,000 sq ft, increasing pressure on City property prices and rental income growth.

‘The loss of 6,500 jobs will naturally slow down the market . . . but the supply side is still tight enough to stomach such an eventuality,’ said Alastair Hilton, partner at property services firm Cushman & Wakefield.

The City has capacity of about 58 million sq ft, equivalent to over 100 times the floor space of the so-called ‘Gherkin’, a distinctive 180-metre tower completed in 2004.

Industry figures put the City-wide vacancy rate at 10.7 per cent.

Players say that if job losses escalate beyond the expected level, an overhang of supply could tip the district into a more severe commercial property recession.

And with more than half a dozen developments due to spring out of London’s crane-filled skyline by 2010, they accept that the market has entered its most risky phase.

Mr Hilton said that banks were unlikely to vacate great swathes of space even after the layoffs as many took a contra-cyclical view to maintaining presence in the supply-constricted Square Mile.

But take-up has slowed sharply in recent weeks, as would-be tenants delayed decisions amid financial market volatility. Data from property services firm Ingleby Trice Kennard showed that occupiers took up a total of 230,000 sq ft in the City of London in September against August take-up of 420,708 sq ft, leaving around 6.2 million sq ft of offices empty.

While the glut of space is putting pressure on rental and capital growth, Mr Hilton said, investors were reassured by the fact that much of the current nine million sq ft development pipeline was already pre-let, in contrast to the early 1990s when the City office market collapsed under the burden of around 18 million sq ft of unoccupied space.

Developer Land Securities recently announced a City pre-let of 120,000 sq ft to law firm Kirkpatrick & Lockhart Preston Gates Ellis, despite concerns about a deteriorating global economy.

City development programmes or acquisition drives to coincide neatly with an upturn in occupier demand has always been a gamble, but Duncan Owen, chief executive of City Landlord Invista Real Estate Investment Management, said that tenants were still queuing up for quality accommodation.

‘We’re negotiating 83 lettings across our London portfolio right now. Not one of them even looks like it might fall through and all of them are at business plan rental increases,’ he said.

Mr Hilton said that the loss of 10,000 jobs would seriously threaten rental growth, the profitability of several developments and office investment yields – already vulnerable as UK commercial property sector prices fall.

 

Source: Reuters (Business Times 11 Oct 07)

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