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Jones Lang LaSalle offers solution for London office development drought

London, 17th May 2010 – Jones Lang LaSalle has addressed the drought in the London office market pipeline and reveals a growing opportunity for Grade B office space to be refurbished and repositioned as Grade A to bridge the ever increasing supply gap. 
Dan Burn, head of City Agency at Jones Lang LaSalle, said: “The arrival of the credit crunch and subsequent global recession led to the brakes being firmly applied to speculative development.  There was no development finance, no developer or market confidence, little tenant demand and development appraisals were unviable.  As a result, there is now an imminent supply gap of Grade A office product in London.  If the market does not respond, this shortage is likely to become very severe by 2011.”
Dan continued: “Upgrading Grade B product to Grade A standard seems a logical, relatively low risk opportunity to bridge this supply gap before new build developments reach completion.  Grade A rents also look likely to outperform prime after 2012 in London as the differentials between the two narrow.  This strategy therefore offers investment outperformance opportunities.”
At the end of Q1 2010, Grade B supply accounted for 40% of total supply in London compared with 30% at the equivalent period in 2009.  It has increased by more than 130% since 2007 to reach 6.2 million sq ft. Over the last 6 months, however, Grade A supply has shrunk 25% in London – and 40% in the City .  Bill Page, Head of EMEA Office Research at Jones Lang LaSalle, said; “Around 55% of Central London Grade B stock is controlled by landlords which may give them the ability to action changes.  Rental reductions and generous incentives in 2009 made Grade A space relatively attractive for those tenants in a position to deal.  As a consequence, activity was more focused on Grade A (74% of take-up was on Grade A stock) and Grade B space was relatively harder to let and its performance suffered.”
Dan Burn concluded: “Whilst the arguments for speculative development are becoming stronger, there is a shortage of immediately implementable good quality schemes that can be delivered before 2014 and more importantly construction finance for them. As a consequence, the rents for the available / under construction supply will continue to advance.  With the above constraints, inevitably, we will see the return of pre-lets this year for occupiers seeking possession post 2012/3 and for some of the larger schemes it will be a necessity in order for them to start.
“In the interim, we expect to see more developers pursue an upgrading strategy in 2010 and 2011.  This will erode some of the Grade B supply in the market, particularly the landlord controlled units available on a short term basis – but occupiers with surplus Grade B space may also be able to surrender their space to landlords keen to seize this opportunity.  If timing is right, deliveries will occur when the amount of new build supply is critically low so there should be no oversupply risk of competing new Grade A stock.  If timing is delayed, there is a risk that deliveries post -2013 will coincide with a supply response in the new build development market.”