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Subdued Q1 2010 office leasing activity in Western Corridor reflects occupier caution

Number of new requirements should improve take-up over remainder of year

London, 26th April 2010 – According to Jones Lang LaSalle’s latest research, less than 250,000 sq ft of office space was let in the Western Corridor region in the first quarter of 2010, 21% less than Q4 2009 levels and the lowest quarterly total for 15 years. On a more positive note, there is still leasing activity in the region being generated by market churn and the number of deals completed has not fallen in comparison to Q4 2009. This does mean however that their average size has fallen. The largest deal, and notably the only one over 20,000 sq ft, to complete in Q1 2010 was at Centurion, Watchmoor Park in Camberley, where 22,700 sq ft was leased to IT services company Telindus. Most leasing activity was focused in the sub 10,000 sq ft segment, with an average deal size of 10,800 sq ft, compared with 21,800 sq ft in 2008.

Commenting on the figures, James Finnis, head of National Offices at Jones Lang LaSalle, said: “With cost remaining high on the corporate agenda, take-up in Q1 2010 reflects the inherent cautious approach still being adopted by occupiers. If corporates do not have to move then they are opting for the easier route of a lease re-gear to put off the capital expenditure which an office relocation brings. If the current deals in solicitor’s hands happen then Quarter 2 will be much better.”

Active demand at the end of Q1 2010 was 2.3 million sq ft; an increase of 77% in comparison with same period last year. This was due to limited take-up activity and a number of new requirements being brought to the market including Bosch (100,000-120,000 sq ft) and Centrica, who released a 100,000-120,000 sq ft requirement. Jones Lang LaSalle expects current demand to translate into take-up over the remainder of the year as occupier confidence improves.

James Finnis added: “The West London suburbs are seeing real activity in the sub 15,000 sq ft market. Smaller occupiers are growing out of serviced office accommodation and taking conventional space – there is also an influx of smaller footloose requirements which are moving from the more expensive fringe West End locations to take space in Hammersmith and Chiswick.”

Occupier focus is on Grade A space but not necessarily prime, due to a desire to limit future liabilities that may arise from the occupancy of poorer quality stock as well as by the perceived value. Reducing occupational costs will remain on the agenda throughout 2010, impacting requirements and may drive some consolidation activity. Large floorplates, which offer the ability to occupy space more efficiently, are likely to be most popular and will drive a bias for Grade A space.

Supply increased 9% over Q1 2010 to over 13 million sq ft, reflecting a vacancy rate of 15.1%. The differential between the two submarkets continued to rise, with the Thames Valley significantly more oversupplied with a vacancy rate of 20.1% against 10.2% in West London. This is further pronounced with regards to Grade A supply. The speculative completion of 63,000 sq ft at Reading Central, helped to push Grade A supply upwards in the Thames Valley to 10%, while Grade A supply remained relatively stable in West London at 4.8%. Almost 200,000 sq ft of offices remain under construction speculatively and no further starts are anticipated over the short to medium term.

Prime rents remained stable across the market, but there are pockets of upward pressure emerging in West London. Incentives were stable at 30 months rent free on a 10-year lease in the Thames Valley and 27-30 months in West London.

James continued: “There are pockets of limited supply in the Western Corridor – particularly in West London. If occupier demand continues to increase then we could see positive pressure on rents. However, locations with surfeits of supply will continue to be challenging and aggressive financial deals will be needed to get space let.”

James concluded: “There are signs of developers emerging, positioning themselves for the next cycle. However, speculative development in most locations remains a distant prospect. We will see some refurbishment activity being brought forward in the West London suburbs with developers seeking to get ahead of the market and bring good quality space forward in markets of limited supply.”