For the first time the effects of the credit crunch began to seep through into the West End office market as faltering confidence, a lack of credit and corporate cutbacks began to bite.
"There is no doubt that the strength has gone out of the investment market and with it the confidence of many developers", says Bill Siegle, Cluttons' head of commercial. "Core West End yields of 5.25 per cent continue to attract overseas buyers but interest from home-grown funds is at an early stage and the events of last week will make it harder for them to identify the appropriate level of risk to income. Those funds who recently began looking at the market again will need to hold their nerve."
With corporate occupiers increasingly cautious, tenant demand is down by 25 per cent from the previous 12 months. The slowdown in the occupier market helped push Grade A availability up by nearly 200,000 sq ft (18,500 sq m) to just over 1.5 million sq ft (143,000 sq m), a return to levels not seen since Q1 of 2007 although still some way short of the 2.8 million sq ft availability of 2004.
Of greater concern is the increase in the amount of Grade B space that has come on to the market, up by 71 per cent to just under 1 million sq ft (85,000 sq m) from this time last year, its highest for over 2 years. The increase has followed tenants seeking to sub-let surplus 'grey' space, much of which has been the subject of 5-yearly rent reviews where typical Grade B rents have risen to £47 per sq ft (£506 per sq m), up by 50 per cent from 2003 levels.
"Unfortunately for some the timing of these 5-yearly rent reviews could not have come at a worse time", continues Bill Siegle. "The increases have had the effect of driving some traditional West End tenants away to fringe locations where average rents remain at 2003 West End levels."
However, while total availability increased by 30 per cent from a year ago to just under 2.5 million sq ft (228,000 sq m), the vacancy rate remains at a respectable 4 per cent of overall stock, and equivalent to just one year's take-up at current rates. The low vacancy rate helped keep typical prime rents at £65 per sq ft (£700 per sq m), with the prime headline West End rent in Mayfair and St James's easing down to £110 per sq ft (£1,184 per sq m).
The West End's famously restricted development pipeline has loosened over the last year as speculative space under construction rose by 100 per cent from the same quarter last year to just over 1.7 million sq ft (158,500 sq m), its highest level since August 2005. Speculative space now accounts for 72 per cent of total space under construction, its highest proportion in over five years.
The rise in speculative space may begin to delay development of the 2.3 million sq ft (217,500 sq m) with planning permission, without a significant pre-letting in place. A further indicator of caution is the low number of outstanding planning applications awaiting approval, which dropped sharply to just 70,000 sq ft (6,500 sq m) during the quarter, suggesting that the sense of urgency amongst developers has evaporated.
"This quarter we witnessed the continuing slowing of the West End office market," continues Bill Siegle. "The events of last week are almost certain to make investors and occupiers even more cautious but 2009 is likely to prove the nadir before things begin to improve."