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Posted Feb 28, 2008, 1:53 AM
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Join Date: Jun 2006
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London Stalling?
Quote:
London Stalling?
Building Boom Gives Way to Fears of Vacant Office Space
As Credit Crisis Prompts Banks to Curb Expansion Plans
By JEANNE WHALEN
February 27, 2008; Page B1
LONDON -- Seen from above, London's center resembles a big construction site, a testament to the commercial-property boom that has accompanied the British capital's rise as a global financial center.
But as banks put a lid on expansion plans amid a deepening credit crisis, some landlords and developers are worried the ubiquitous construction cranes will give way to vacant office space.
More than eight million square feet of office space is being built in the financial district, known as the City, and a good chunk of it will become available this year and next, according to Knight Frank, a property consultancy. That level of construction is about 60% higher than the City's 10-year average.
About 80% of the space under construction is considered "speculative," meaning the developers don't yet have tenants lined up, according to Knight Frank. Normally, about half of the space under construction in the City is speculative. At the same time, new lease signings in the City fell by 49% in the fourth quarter from the previous quarter, as banks put a lid on expansion plans. Australian investment bank Macquarie Group Ltd., for instance, postponed plans to lease about 300,000 square feet of office space for a new London headquarters.
Some banks also are cutting back on their existing office space. Earlier this month, Citigroup Inc. quietly put on the market five floors of its 42-floor office tower in Canary Wharf. The company leases the space and is trying to sublet the empty floors, says spokesman Rob McIvor. He said the bank was able to open up the space after tightening staff seating plans. He said the empty floors aren't related to layoffs of fewer than 100 London staffers in recent months.
Developers started the building boom several years ago as banks, law firms and other companies expanded quickly. In many cases, property firms knocked down buildings from the 1930s, 1950s and 1980s to make way for towering structures of glass and steel. The City's mix of centuries-old architecture and cheap post-World War II construction didn't appeal to big banks, in particular, which wanted large, open trading floors and modern facades.
But as the new buildings rise next to London's most historic sites, from St. Paul's Cathedral to the medieval Guildhall, some critics are balking. In a speech last month, Prince Charles, an outspoken architecture critic, called many of the new buildings "carbuncles" that will leave London with a "pockmarked" skyline. "For some unaccountable reason we seem to be determined to vandalize these few remaining sites which retain the kind of human scale and timeless character that so attract people to them and which increase in value as time goes by," he said.
Save Britain's Heritage, a nonprofit group, has tried to fight some of the new construction. The group's secretary, Adam Wilkinson, says London's charm is in its winding streets, pubs and historic churches. "To have that intruded on by a tall building distorts that. It destroys that impression of being in a small village, which is one of the things that makes London bearable as a place to live," he says.
The British are fond of giving their buildings nicknames: a pickle-shaped skyscraper by renowned architect Norman Foster completed in 2004 was quickly dubbed the Gherkin, while a 47-floor tower under construction is now called the Cheese Grater because its right-triangle shape looks ready for a giant hunk of cheddar. Developer Land Securities is in the midst of demolishing a building to make way for a 39-floor tower dubbed the Walkie Talkie because it vaguely resembles one. Other proposed buildings are called the Shard of Glass, the Helter Skelter, and the Boomerang.
Commercial real estate is, of course, prone to boom-and-bust cycles. From the time developers sense demand rising it can take years to complete new buildings, by which time demand often wanes. Concern that rental income would stop growing as quickly has contributed to a fall in U.K. commercial-property prices over the past year. The drying up of easy loans that helped investors buy buildings has compounded the drop.
Knight Frank forecasts that office vacancy levels in the City will rise to 10% by the end of the year, from 7.9% at the end of 2007. The City's 10-year average vacancy rate is 8.9%. By comparison, office vacancy rates in Manhattan are about 4% to 5% currently and are expected to stay level this year, says Peter Riguardi, president of Jones Lang LaSalle in New York. In Manhattan's prime financial neighborhoods, midtown and downtown, about 15 million square feet of office space is under construction, including 10 million square feet at the World Trade Center site, he added.
British Land, one of Britain's largest property firms and the developer of the "Cheese Grater," also is building a pair of towers next to Liverpool Street train station, due to be completed this year, that will put 822,000 square feet of new office space on the market. The towers, designed by well-known architectural firm Skidmore Owings & Merrill, are "the biggest speculative office development ever undertaken in the City of London," British Land's Web site says.
A British Land spokeswoman says the smaller of the two towers is now 75% rented, while the larger, 35-story tower is 36% rented. She said the company expects lease signings to be slow in the next few months but doesn't see that as a cause for concern.
With supply growing and demand falling, tenants are gaining power. Robert Leigh, a realtor with the real-estate agency Devono, says he believes City rents will fall "significantly" in the next six to nine months, and that landlords will be offering more perks to win tenants. Mr. Leigh said he and his clients have already started pushing landlords for longer rent-free periods, smaller deposits and shorter leases. He said it was too early to say whether they will be successful in achieving their demands.
The rest of London hasn't experienced as intense a building boom as the financial district and isn't expected to experience the same vacancies. In the West End, for example, where many media companies and hedge funds have offices, stricter zoning rules mean there is less construction under way.
In a sign of the uncertainty, developers are looking for ways to lower the risks of big, new construction projects. Land Securities still is deciding how it will finance construction of the Walkie Talkie, says spokesman Donal McCabe. He said the firm could bring in a partner to help with financing, or try to find tenants before beginning construction -- something that lowers risk but brings in less rental income than finding tenants once a building is complete. "We're in no hurry to make a decision on how we might take it forward," he said.
Land Securities was forced to reduce the building's size to 39 floors from 46 floors after critics complained that it would disrupt views of St. Paul's Cathedral. The building, scheduled for completion in 2012, will have a rooftop garden and 600,000 square feet of space.
Write to Jeanne Whalen at [email protected]1
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Source: http://online.wsj.com/article/SB120407224755595045.html
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