By Chris Bourke
May 14 (Bloomberg) -- Anyone driving a BMW 3-series convertible in London probably knows the price has doubled since 1991. A three-bedroom home in Chelsea fetches almost three times what it cost 18 years ago. And at Le Gavroche, the two-Michelin- star menu favored by bankers since the Big Bang of the 1980s, dinner will set you back 33 percent more than you paid when Margaret Thatcher was prime minister.
It’s another story in the City of London, where office rents in the U.K.’s main financial district are falling to 1991 levels as job losses and a mistimed building boom depress prices.
The City already has enough empty offices to hold two- thirds of Canary Wharf, the docklands area developed 1 1/2-miles east in the 1980s to lure investment bankers. About 9 million square feet (855,000 square meters) are available in the City and that may climb to 12 million by the end of 2009, according to CB Richard Ellis Group Inc., the biggest commercial property broker. Almost 19 percent of all City offices may be vacant next year, analysts at CB Richard Ellis estimate.
“We’re in the eye of the storm,” said Bryan Higgins, chief investment officer of Irish homebuilder Menolly Group, which bought 107 Cheapside in the City three years ago for 150 million pounds ($227 million). The building has no tenants. “Supply way exceeds demand,” he said.
Rents will drop to 40 pounds per square foot by the end of this year, the same as 1991 when Canary Wharf got its first tenants, analysts at London-based King Sturge International LLP estimate. Prices declined to 46.50 pounds per square foot in the City during the first quarter from a high of 65 pounds in mid- 2007. Rents fell to as low as 30 pounds two years after Canary Wharf opened.
Square Mile
The City is reeling after the increase in building that followed the construction of more than 10 skyscrapers at the 97- acre Canary Wharf site along the Thames River.
Canary Wharf was perceived “as a complete threat,” said Colin Hargreaves, who leases offices in London for Jones Lang LaSalle Inc., the second-largest publicly traded commercial broker. The idea was to build “something really big, so we can fight Canary at their own game. You end up with the buildings you’ve got now,” he said.
The City of London, also known as the Square Mile because of its size, is home to more banks, insurers and other financial-services companies than anywhere in Europe. About 300,000 people work in the district.
“There was a need to have a credible alternative” to Canary Wharf, said Martin Jepson, head of Hammerson Plc’s London business. These days “there are bigger fundamental issues” for the banks, he said, referring to the record credit-market losses that the industry have sustained since 2007.
Tower 42
The first-quarter drop in rents occurred as 1.4 million square feet of space flooded the market. The largest addition was Hammerson’s tower at 60 Threadneedle St. The eight-story building has a 6,000 square-foot reception area, art-deco elevators, roof gardens, views of the Bank of England, and no tenants. About 25 percent of the building is under offer, according to Hammerson.
Threadneedle is about a one-minute walk from the workplace of Alex Wilson, 59, who has guarded offices in the financial district for six years.
“There’s so much empty space around here, it’s unbelievable,” he said.
Wilson works at 10 Throgmorton Ave. and next door is a 13- story structure being built at Drapers Gardens that will add another 270,000 square feet.
Cheesegrater’ Delay
The City’s first skyscraper, Tower 42 at 25 Old Broad St., opened in 1980 and was followed 10 years later by Canary Wharf’s 50-floor building at One Canada Square. The City now has about 115 million square feet of office space, compared with 15 million at Canary Wharf, according to Jones Lang LaSalle.
The credit crisis caused British Land Co. to delay a development last year at 122 Leadenhall, nicknamed the “Cheesegrater,” which would have been the area’s tallest building at 738 feet. Land Securities Group Plc postponed construction of the “Walkie Talkie” tower at 20 Fenchurch St.
British Land, the U.K.’s second largest real estate investment trust, finished Broadgate Tower, a skyscraper on the City’s eastern fringes, last August. Half of the building’s 30 floors are empty, with 11 leased to law firm Reed Smith LLP. Next door is 201 Bishopsgate. British Land has rented 85 percent of the building, mainly to fund manager Henderson Group Plc.
British Land expects to complete the 586,000-square-foot Ropemaker tower in the third quarter. About 38 percent of that project has been leased to Bank of Tokyo-Mitsubishi UFJ Ltd. The bank will pay no rent for the first four years, according to an April 7 statement from British Land.
Watermark to St. Botolphs
“Rising vacancy rates in the City have a hugely depressive impact on rental values, and thus capital values,” said Aaron Guy, a London-based analyst at Collins Stewart Plc, who has a ‘sell” recommendation on British Land and rates Hammerson “hold.” “It’s one of the key issues this year.”
UBS AG, the biggest Swiss bank by assets, and Canada-based Oxford Properties haven’t secured tenants for Watermark Place, a 525,000-square-foot redevelopment of a former British Telecom headquarters on the Thames. It’s scheduled to be completed later this year.
“We’re certainly not in a position to let the building very soon, but inquiry levels for the building are actually quite healthy,” said Sam Sananes, a London-based director at UBS Global Asset Management Ltd.
Manhattan-on-Thames
The 445,000-square-foot Walbrook development from Minerva Plc, due to be completed this year, has no tenants. Minerva is also constructing a 560,000-square-foot office building called St. Botolphs, to be finished next year. About 84,000 square feet are leased, according to the London-based company.
JPMorgan Chase & Co., the biggest U.S. bank by market value, spent more than a year negotiating with Hammerson to build its new headquarters in the City. The New York-based company then opted to pay Canary Wharf’s owners 237 million pounds to build a tower there instead. The offices won’t be ready until at least 2012.
Canary Wharf, sometimes referred to as Manhattan-on-Thames, rose from a swamp. The island was known as Stepney Marsh in the 1200s and became the core of the world’s largest port during the 19th century. Most of the docks were shut by 1980 when Margaret Thatcher’s government initiated a revival of the area.
State Street Corp., the world’s largest money manager for institutions, became the first tenant of the new Canary Wharf in August 1991. HSBC Holdings Plc, Lehman Brothers Holdings Inc. and Citigroup Inc. also moved in.
‘Grey Space’
Canary Wharf Group, the estate’s main landlord, decided in 2005 to only build towers that tenants agreed to rent. When the credit crunch appeared in mid-2007, the company had built 14 million square feet of space, or 30 buildings for about 93,000 workers. Just 2.5 percent of it was vacant then and about 8 percent is empty today after the addition of new buildings, according to data compiled by King Sturge.
“Eighteen months ago the Wharf was absolutely full, you couldn’t squeeze another desk down there,” said Rupert Perkins, a partner at King Sturge. Canary Wharf has been better able “to absorb these vacancies” than the City, he said.
Vacancies may exceed 10 percent, including “gray space” that tenants are trying to privately sublet, and space that may become free over the next two years, said Deborah Hayward, head of research at King Sturge.
Dry Cleaners
Canary Wharf tenants, including Citigroup, Barclays Plc and Morgan Stanley, fired workers during the past two years as losses from the mortgage market widened and Lehman Brothers went bankrupt. About 28,000 jobs were eliminated across London’s financial industry in 2008, and a similar number will be cut this year, according to estimates from the London-based Centre for Economics and Business Research.
Doreen Price, 65, has dry-cleaned and pressed the suits of Canary Wharf workers for so long that she feels like “part of the furniture.”
“Most of our regular customers have gone,” said Price, who works in Cabot Place, one of Canary Wharf’s four shopping malls. “There are some new faces about, but I would say it’s gone back to how things were about seven years ago.”
Citigroup, which has 1.2 million square feet on 42 floors at 25 Canada Square, is trying to sublet 135,000 square feet of excess space, according to John Westwood, the bank’s head of real estate. It has already leased 162,000 feet since last year, including 116,000 feet to Crossrail, the builder of London’s planned over-ground railway.
Songbird Estates
Barclays Capital has 140,000 square feet at 40 Bank St. that it’s never occupied and law firm Clifford Chance LLP is trying to sublet 100,000 square feet at its Upper Bank Street offices, according to Perkins at King Sturge. None of that is included in official vacancy figures compiled by brokers.
Canary Wharf Group has suffered financial setbacks even with the more stable occupancy levels. Songbird Estates Plc, the company’s biggest investor, said in a March 26 statement it was at risk of breaching terms of an 880 million-pound loan. Canary Wharf Group had to buy back 120 million pounds of bonds in April at an average 70 percent discount to cut its debt costs.
While Morgan Stanley plans to give up 345,000 square feet at Canary Wharf’s 20 Cabot Square next year, or about 25 percent of its space, Moody’s Investors Service, State Street, KPMG International and Fitch Ratings are due to occupy about 1 million square feet by the end of 2010, King Sturge estimates.
The City has no such waiting list.
“The big question is when is the City economy going to emerge from its present travails and again see occupiers taking space,” said Peter Damesick, head of U.K. research at CB Richard Ellis. “I don’t think anybody’s got a definitive answer” to that question, he said.
To contact the reporter on this story: Chris Bourke in London at cbourke4@bloomberg.net.
Last Updated: May 13, 2009 19:01 EDTPowered by ScribeFire.
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