London, 17th October 2011
- The Western Corridor maintained encouraging levels of occupier demand over the third quarter of 2011, say Jones Lang LaSalle
in their latest Western Corridor Q3 report. Following the uplift in demand recorded in Q2, the third quarter saw the level of active requirements stabilise at around 3.2 million sq ft, up 53% on the same period last year (Q3 2010). As with previous quarters, demand continues to be dominated by the Manufacturing and Services sectors (in particular the pharmaceutical and TMT sub-sectors) which together account for around 88% of active named demand in the Western Corridor.
As predicted last quarter, the uplift in demand levels experienced in Q2 2011 transposed into improved take-up levels during the third quarter. However, we remain cautious about market conditions given wider economic uncertainty which will impact on, and may delay, occupiers’ decision-making and potentially, space requirements. During Q3 there was 602,000 sq ft of space taken-up in the Western Corridor, a significant increase on the exceptionally low level of take-up recorded in Q2 and 9% higher than the five-year quarterly average of 553,000 sq ft.
Take-up for the first nine months of 2011 stands at 1.2 million sq ft, with Q3 alone matching the level achieved during the first six months of the year. Key deals in Q3 included Astellas Pharmaceuticals acquisition of 100,150 sq ft of space in Chertsey, Saipem leasing 93,000 sq ft in Kingston-upon-Thames and Novartis taking 64,230 sq ft in Camberley. These deals reinforce the strength of the Manufacturing sector in the Western Corridor, in particular pharmaceuticals and oil, which accounted for 76% of all floorspace transacted during Q3.
James Finnis, Director, Head of South East Office Agency, commented that; "Take-up volumes recovered in Q3 as the surge in demand witnessed in Q2 fed through to transactions. There is a healthy crop of new substantial requirements in the Western Corridor. Of these requirements well over half are being driven by growth reflecting the confidence in some business sectors. However, we are forecasting that the majority of these requirements will not transact until 2012 so take-up volumes by the end of 2011 will be lower than those seen in 2010."
Overall supply in the Western Corridor fell to 12.0 million sq ft in the third quarter, reflecting an overall vacancy rate of 13.8%. Total supply levels continue to be slowly eroded and are 2.4% lower than the same period last year driven largely by declining Grade A stock. The Grade A vacancy rate for the Western Corridor as a whole stood at 5.5% in Q3, compared to 5.9% in Q2 and 6.3% in Q3 2010. The shortage of Grade A stock is most pronounced in the West London submarket where the vacancy rate stands at just 2.9% of total supply, the lowest level for nearly 10 years.
There continues to be considerable variation across the region with the Grade A vacancy rate for the Thames Valley (8.2%) almost three times the West London rate, with the overall vacancy rate for the Thames Valley remaining very high at 20.3%. There is just 282,500 sq ft of space under construction on a speculative basis, with only 42,000 sq ft (80 Hammersmith Road) due to complete this year. With Grade A supply volumes continuing to fall, strong levels of active demand and a possible14.0 million sq ft of lease events generating structural demand over the next three years, there is a window of opportunity for developers to take advantage of refurbishment opportunities in core (predominantly town centre) locations, moving Grade B stock up to Grade A standards.
James Finnis added; “The window of opportunity is open for speculative development and refurbishment in West London and certain locations in the wider Western Corridor. Assuming demand comes through as we are predicting then there is a supply shortage of Grade A stock end 2012 beginning 2013. This will lead to competition for the best stock and sustained rental growth."
Across the Western Corridor, rents increased slightly over the quarter (+1.4%) driven by further upward pressure in Reading town centre and Chiswick and a re-positioning of rental expectations in Slough. Rents in the remaining key centres were stable compared with the previous quarter. Incentives were also stable at 30 months’ rent free on a 10 year lease in the Thames Valley and 24 months in West London. We expect annual growth of 1.4% over 2011 taking the average prime rent for the region to around £28.00 by year end.