Seen from above, London’s centre resembles a big construction site, a testament to the commercial-property boom that has accompanied the British capital’s rise as a global financial centre.
But as banks put a lid on expansion plans amid a deepening credit crisis, some landlords and developers are worried the ubiquitous construction cranes will give way to vacant office space.
More than eight million square feet of office space is being built in the financial district, known as the City, and a good chunk of it will become available this year and next, according to Knight Frank, a property consultancy.
That level of construction is about 60 per cent higher than the City’s 10-year average. About 80 per cent of the space under construction is considered “speculative”, meaning the developers do not yet have tenants lined up, according to Knight Frank. Normally, about half of the space under construction is speculative.
New lease signings in the City fell by 49 per cent in the fourth quarter from the previous quarter, as banks put a lid on expansion plans. Australian investment bank Macquarie Group Ltd postponed plans to lease 300,000 square feet of space for a new London headquarters.
Some banks also are cutting back on their existing office space. Earlier this month, Citigroup Inc quietly put on the market five floors of its 42-floor office tower in Canary Wharf.
Developers started the building boom several years ago as banks, law firms and other companies expanded quickly. In many cases, property firms knocked down buildings from the 1930s, 1950s and 1980s to make way for towering structures of glass and steel.
But as the new buildings rise next to London’s most historic sites, from St Paul’s Cathedral to the medieval Guildhall, some critics are balking.
Save Britain’s Heritage, a nonprofit group, has tried to fight some of the new construction. The group’s secretary, Adam Wilkinson, says London’s charm is in its winding streets, pubs and historic churches. “To have that intruded on by a tall building distorts that.
The British are fond of giving their buildings nicknames: a pickle-shaped skyscraper by renowned architect Norman Foster completed in 2004 was quickly dubbed the Gherkin, while a 47-floor tower under construction is now called the Cheese Grater because its right-triangle shape looks ready for a giant hunk of cheddar.
Commercial real estate is, of course, prone to boom-and-bust cycles. From the time developers sense demand rising it can take years to complete new buildings, by which time demand often wanes.
Knight Frank forecasts that office vacancy levels in the City will rise to 10 per cent by the end of the year, from 7.9 per cent at the end of 2007. The City’s 10-year average vacancy rate is 8.9 per cent.
British Land, one of Britain’s largest property firms and the developer of the “Cheese Grater”, is also building a pair of towers next to Liverpool Street railway station, due to be completed this year, that will put 822,000 square feet of new office space on the market.
A British Land spokeswoman says the smaller of the two towers is now 75 per cent rented, while the larger, 35-storey tower is 36 per cent rented. She said the company expects lease signings to be slow in the next few months but does not see that as a cause for concern.
With supply growing and demand falling, tenants are gaining power. Robert Leigh, a realtor with Devono, says he believes City rents will fall “significantly” in the next six to nine months, and that landlords will be offering more perks to win tenants.
8m: square feet of office space is being built in the City, London’s financial district, of which a good chunk will become available in 2008 and 2009
49%: has been the decline in new lease signings in the fourth quarter of 2007 from the previous quarter as banks put a lid on expansion plans in the City
London boom gives way to vacancy fears