No Armaggedon, but London office rent will begin to fall in the months ahead.

Q4 2016 rental levels remain largely the same as the previous quarter for quality office space. But below the surface, the market is turning in favour of tenants.

We have identified 3 clear, emerging signals indicating that reduced rents are on the way:

1. Rent Free Periods

We have seen a trend of rent free incentives increasing to 1 month per year of a lease, which shows over 8% effective reduction in rent through the term.

We saw a deal in Covent Garden just before Christmas where a 7 month rent free period for the first 5 years of the lease enticed the tenant –  plus an additional 7 month’s rent free should they choose to remain for the full 10 year term. This was for a high up Grade A office with lots of outside space.

2. Capped Service Charge

It has become easier (but not always possible) to negotiate service charge caps. Landlords have historically resisted caps which may prevent them from recovering unforeseen building running costs, such as energy prices increases or perhaps the roof falling in!

However, we are currently often able to negotiate caps to protect tenants against future, unanticipated service charge hikes.

No Armaggedon, but London office rent will begin to fall in the months ahead.

3. Lease Flexibility

Years ago, landlords liked to grant very long leases for 15 to 25 years without break. But in today’s market (especially for smaller office space below 10,000 ft2) tenants demand flexibility. They don’t want their businesses constrained by long office leases.

In a more dynamic market we are asking landlords to have more confidence in their buildings and to allow tenants to negotiate options to break after 3 or – more commonly – 5 years.

The Next Quarter – Reduced Rents

I think these 3 signals are a prelude to rents finally starting to fall in central London. I’m not predicting Armageddon, but landlords will have to become competitive in order to ensure their office space is let. Tenants will also have an eye on business rates, which on average are increasing by around 15–20% throughout many central London office locations. And rates are rising more in areas that have already experienced sizeable increases over the last 5 years, such as Clerkenwell & Shoreditch.

Keep an eye on our London Office Rental Guide – updated every quarter.

And watch this space!

3 important signals clearly indicating reduced rents are imminent

About Ian Kitchener

Ian Kitchener

Ian has advised Central London office occupiers for over 20 years. He loves fighting their corner and making sure they get what they need - a great office on the best commercial terms available.

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