9 October 2015

Availability in Midtown has dropped to an all-time low 2.5% with occupier demand driving rents to unprecedented levels.

The 3rd Quarter saw a new record rent achieved at One Strand, WC2, with asset manager Zebulon achieving £85 per sq ft in a deal with hedge fund CQS on the building’s 27,620 sq ft fourth floor. The transaction exceeds the previous high of £83.00 paid by United Artists Media Group at Orion House, WC2, underlining that the migration of traditional West End occupiers to Midtown is driving rental growth.

Take-up was again robust in the 3rd Quarter, totalling 878,509 sq ft, which comfortably exceeds the 10 year quarterly average. This figure, buoyed by transactions totalling 242,000 sq ft by King’s College at Aldwych Quarter, indicates that Midtown will defy its historic low Availability Rate to reach 2.5 million sq ft of Take-up in 2015.

Indeed, analysis of the significant commitments in Midtown [20,000 sq ft or more] since the 1st Quarter 2014, shows that the Education sector has accounted for a large proportion [14%]. However, the Legal sector, traditionally dominant in Midtown, has accounted for a fifth of transactions over 20,000 sq ft during that period, with Banking and Financial, Professional Services, Services Offices and ‘DAMIT’ [Design, Advertising, Marketing & PR, Media, Internet and Technology & Telecoms] all accounting for over 10%, highlighting the diversity that exists in the occupational market.

Analysis of Take-up in the 3rd Quarter does, however, reveal a noticeable downturn (28%) in total transactions versus the previous quarter. Our research indicates a slowdown in ‘churn’ at the lower level, with occupiers opting to regear rather than move given the paucity of available stock. There is a strong development pipeline in 2016, with 619,603 sq ft of speculative space due to come on stream in Q2 and Q3, as a cause for optimism that Availability Rate will not remain below 3% in the mid-term.

Investment transactions totalled £1.04bn in the 3rd Quarter, over three times the level of activity recorded in the previous period [£332 million]. We anticipate a further uplift in the 4th Quarter as deals complete for year-end. Activity is being driven by Overseas Investors, who accounted for 83% of activity in the period, with 43% of all transactions by value attributed to buyers from the Far East.

Jules Hind, Leasing & Development Partner at Farebrother, said:

"This is undoubtedly an eye-catching quarter as we’ve seen a new rental benchmark established in Midtown, and the supply squeezed to unprecedented levels. We look ahead to 2016 with optimism as we anticipate a new wave of development and refurbishment, which will go some way to easing this."

“In 2015 we are seeing a rebalancing of the market; previously Take-up has been sustained by the sheer volume of deals at the lower level, but now this is being counter-balanced with a more regular stream of big-ticket lettings and pre-lettings. This underlines that demand – and opportunity – exists at all levels, and new or re-purposed space released into this market will let well.”

Alastair Hilton, Investment Partner at Farebrother, said:

“This is certainly a very strong quarter from an investment perspective, and we expect to see a similar level of activity in the 4th Quarter. Overseas Investors have been driving activity in Midtown for some time, and we expect a rebalancing moving forward as the UK buyers become more active. Crossrail makes the market a more compelling proposition in the mid and long-term, and more returns-focused buyers from the UK should be reassured that there seems to be little chance of occupational demand abating, given the sheer breadth of the companies that are locating here, and the restricted levels of stock.”