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News Release


Western Corridor office take-up at lowest level in a decade

According to Jones Lang LaSalle 1H 2009 research

London, 3rd July 2009 –– Jones Lang LaSalle has released its Western Corridor office market headlines for H1 2009 which show that office take-up in the area is at its lowest level in 10 years.   Take-up has been subdued over the first half of 2009 with just under 615,000 sq ft let, reflecting a fall of 67% below the equivalent period last year.  The market was driven by companies within the IT sector – either in software production or hardware manufacturing – accounting for almost 30% of space let.
Commenting on the research, James Finnis, head of South East Offices Disposals at Jones Lang LaSalle said: “The occupational market in the Western Corridor continues to be adversely affected by the global downturn.   Supply has increased as tenants have sought to reduce property overheads and demand has fallen as a product of general economic uncertainty coupled with tenants seeking to minimise capital expenditure and re-gearing their leases with existing landlords rather than relocating.  In addition to the supply increases noted in our Q2 Statistics we estimate that a further 1.4m sq ft could return to the market in the form of tenant release grey space.”
Supply has continued to increase and was 17% higher than the end of 2008 and 31% above the same point last year.  Most new space placed onto the market has been Grade B second hand space that is controlled by landlords, as plans to refurbish or redevelop space were put on hold. At quarter end, overall vacancy rates were 13%, with Grade A supply at 6.5%. This compares with a 10-year average of 10.1% and 5.7%, respectively.
There has not yet been an influx of tenant controlled “grey space” onto the market. At quarter end tenants controlled only 23% (2.56 million sq ft) of total space on the market. This is anticipated to increase over the next six to 12 months, however, with Jones Lang LaSalle estimating that there is up to 1.4 million sq ft of additional space that could come back to the market. With speculative construction standing at less than 930,000 sq ft, or 1.1% of existing stock, it is this “grey space” that will drive the oversupply conditions in the Western Corridor in 2010.
On a more positive note there was a considerable uplift in active named demand over 2009.  There were more than 1.6 million sq ft of requirements over 5,000 sq ft in the market, which was 74% higher than the end of 2008. This was still 25% below levels 12 months ago, however, and 39% less than the peak in Q2 2007. We expect this demand to result in an increase in take-up levels over the next 12 months, although corporate inertia will continue to have a downward influence on take-up volumes and will remain the biggest challenge to the market.
Overall prime rents fell around 7% over the first six months of 2009 to £28.65 per sq ft. These continued to be inflated by increasing incentives and since 2007 rent-free periods on the 10 year term certain have increased from 15 months to 25-30 months. At the end of Q2, net effective rents stood at around £22.77 per sq ft, reflecting a fall of 19% from their peak in Q4 2007.

James continued: “The investment valuation benefits of securing a long term i.e. 10 year plus lease have fed through to a rash of lease re-gears.  Tenants are taking advantage of this and it is an easy sell for a Finance Director who can secure an incentive package for extending the lease or removing the break without the need for a costly move.  The effect on the take-up figures of this phenomenon are striking resulting in this historically poor performance for the Western Corridor.
“The increase in supply and reduction in demand has had an inevitable effect on rents as landlords have battled to secure those tenants which are in the market.  Net effective rents have fallen faster than headline rentals as the burden of hold costs, including full empty rates and the prospect of a lengthy void have encouraged competition and tenants are able to secure very cost effective packages.
James concluded: “Looking forward we forecast that the second half of the year will be tough but that take-up will increase in the second half of the year.  The financial sector is reporting a more stable environment and we think that well advised tenants will be looking at the market in the near future with a view to taking advantage of the financial packages on offer to trade up into better space at rents lower than they are currently paying.”