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News Release

London

Office occupiers remain cautious according to Jones Lang LaSalle


According to Jones Lang LaSalle, Q3 2009 office take-up activity in the Western Corridor remained subdued, with 273,160 sq ft let, an increase of 5.4% in comparison to Q2 09 but 53% below the equivalent period last year.  Over the year to date, less than 890,000 sq ft has been let in the Thames Valley, 74% below the 10-year annual average of 3.4 million sq ft.

The Manufacturing sector dominated in Q3, accounting for 27% of space let. This was largely attributable to a single deal of 43,315 sq ft to Thames Water at Green Park.  The market continued to be driven by churn and consequently activity was focused in the sub-10,000 sq ft range.  40% of total take-up volume was generated by deals below this threshold, compared with the 10 year average of 14%. It has been encouraging that this churn has remained relatively robust throughout the downturn. Activity in the sub-10,000 sq ft market for the year to date has reached almost 285,000 sq ft, putting it on track to be in line with the five year average of 360,000 sq ft.

Office supply continued to increase in Q3 and was 6% higher than the previous quarter.  This increase was due to a blend of speculative completions and additions of second hand Grade B stock.  More than 420,000 sq ft of deals completed over the quarter.  Most notably, 135,000 sq ft completed at Ealing Cross and 98,500 sq ft reached practical completion at Windsor House, Slough. Grade B space being returned to the market was primarily second hand space controlled by landlords, as plans to refurbish or redevelop space were put on hold.  At quarter end, overall vacancy rates were 13.5%, with Grade A supply at 6.6%.  This compares with a 10-year average of 10.1% and 5.7% respectively.  There has not yet been an influx of tenant controlled space onto the market.  At the end of Q3, tenants controlled only 21% of total space on the market. With limited speculative development in the pipeline any further increases in supply will be driven by tenant released space.

There continued to be an increasing divergence between supply conditions in West London and the Thames Valley. The completion of Ealing Cross in West London pushed supply upwards, with overall vacancy rates ending the quarter at 8.9% with Grade A supply at 4.7%. No further speculative development is anticipated in the market and consequently, Jones Lang LaSalle expects supply to begin to tighten from 2011 with selective shortages to have materialised by 2012. In contrast, supply in the Thames Valley remained inflated. Vacancy rates increased to 18.3% from 17.5%, with Grade A vacancy at 8.7%.

On a more positive note, despite declining levels of take-up, the uplift in named demand seen in Q2 continued into the third quarter.  Demand increased 39% over the quarter, returning it to Q4 2007 levels, with active demand exceeding two million sq ft. We anticipate this demand to result in an increase in take-up levels over the next 12 months, although corporate inertia will continue to put pressure on take-up volumes and will remain the biggest challenge to the market.  Prime rents fell by 1.0% over the third quarter of 2009.  Rents continue to be supported by generous incentives – up to 30 months at the end of Q3, based on a 10- year term.

James Finnis, Head of South East Disposals at Jones Lang LaSalle, said “The take-up statistics reflect the continued cautious occupier sentiment and the ongoing trend for tenants to re-gear their leases and stay in existing space rather than bear the capital cost and risks associated with relocating.  We see this abating in 2010 with tenants taking advantage of market conditions to trade up to better space on attractive terms.  The increase in demand in Q3 reflects the beginning of this new trend.”

James concluded: “The Western Corridor is a mature market and tenant demand is driven by lease events rather than new entrants.  These tenants are looking for either Grade A space or very cheap, flexible deals.  We are forecasting that there will be two active areas of the market in 2010; the best Grade A space, which in certain West London centres is in short supply, and very cost effective flexible deals on good quality Grade B space.”