New office leasing falls to two year low, report shows

The amount of new office space leased in London's financial heartland has fallen to a two year low, with global economic fears deterring some firms from moving and rattling others, according to the latest report from CB Richard Ellis.

A total of 744,000 square feet of space was leased in the City in the three months to the end of June, a quarter below the same period in 2010 and 35% less than the 10 year average, the report said.
It also shows that the figure for central London, including the West End retail and theatre district, fell 19% to 2.2 million square feet.

‘Many firms will be considering whether they need to move given the current economic backdrop. You also have investment banks announcing lay offs, which produces a knock on effect that weakens demand from the rest of the financial services industry,’ said Alan Carter, a property analyst at Evolution Securities.

On Tuesday, UBS said it would cut an unspecified number of jobs as a result of stalling economic growth. On the same day, UK GDP data showed tepid growth of 0.2% in the second quarter.

Large office moves in London have fallen since the last quarter of 2010, which saw a flurry of credit crisis-delayed deals, including JP Morgan's move into a Canary Wharf building once occupied by Lehman Brothers.

‘We are seeing the London leasing market reconnect with the economic fundamentals after a series of deals last year that were driven by pent up demand,’ said Kevin McCauley, head of central London research at CBRE.

Central London developers such as Land Securities and British Land hope a shortage of high quality space and a wave of lease expiries over the next three years will push rents higher.

‘Developers are currently committing capital to large projects in the hope that demand returns but any sane person would have to ask 'are we absolutely sure about this?’ Carter said.

Last August, UBS announced plans for a new 700,000 square feet office block in the City's Broadgate development, which is owned by British Land and private equity firm Blackstone.

However, CBRE said 2011 could be one of the lowest on record for completed central London developments, which helped push the vacancy rate down to 4.9% last quarter, from 6.3% in 2010.
Rents for the best offices were flat compared to the first three months of the year at £55 per square foot in the City and £92.50 in the West End.
 
Investment in central London property increased to £2.3 billion from £2.2 billion in 2010. The largest deal over the period was Google's move into 157,500 square feet of offices in the Central St Giles development.