Office Rents Surge
In London's West End

Office rents in London's West End are soaring to new heights.

In the first six months of this year, office rents in some parts of the capital leapt by more than 50% on the back of strong occupier demand and scant supply of available premises. In Knightsbridge, one of London's most prestigious boroughs -- favored by fund managers and venture capitalists -- rents jumped by 58%, according to real-estate-advisory firm Cushman & Wakefield Inc. This compares with increases of 38% north of Oxford Street, close to one of London's best-known shopping areas, and 17% in Covent Garden, which is popular with media companies.

Office rents in the West End -- which includes Knightsbridge and Covent Garden -- typically range between £80 and £90 ($162 to $183) per square foot a year, although in pricier areas, such as Mayfair and St. James's, rents can now be as much as £120 per square foot a year, according to Cushman & Wakefield. This is almost double typical office rents in the City of London, which are about £65 per square foot a year.

"Rental growth in the West End has exceeded our expectations, driven by very strong demand and a shortage of available properties," says Andy Tyler, a partner in the West End offices team at Cushman & Wakefield in London.

Boston fund manager Permal Capital Management is believed to be in the process of leasing office space at 12 St. James Square for about £130 per square foot a year, which would make it one of the most expensive offices in the city. Permal couldn't be reached for comment.

So far this year, West End office rents have increased faster than in any other major office district in Western Europe, says Kevin McCauley, a director of U.K. research and consulting at CB Richard Ellis in London. In the City of London, rents have risen by 9.1% this year, compared with increases of 10.5% in Paris, 10.1% in Madrid, 13.5% in Stockholm and 16.7% in Moscow, according to CB Richard Ellis. In cities such as Stockholm and Madrid, strong broad-based demand is pushing rents up, says Michael Haddock, director of research for Europe, the Middle East and Africa at CB Richard Ellis in London.

Not all markets performed as strongly: Office rents remained flat in Frankfurt, Milan and Amsterdam in the first six months. Dublin saw more modest growth of 4.3%, says CB Richard Ellis, partly because of an overall vacancy rate of 10.3%. Germany's office market is only just starting to recover. Also, vacancy rates in cities such as Frankfurt and Amsterdam remain high, which curbs rental growth.

And there have been some big office leases signed in the second quarter. Accounting firm PricewaterhouseCoopers LLP has agreed to lease 500,000 square feet at the More London development near Tower Bridge. The new building is due to be completed in 2010 and will house about 6,000 people, according to spokeswoman Oriana Pound. Also, Barclays Capital took 301,475 square feet at 40 Bank Street in Canary Wharf, where occupation will be phased in gradually up to October 2008.

In total, around 7.87 million square feet of space was leased in central London in the second quarter, including 2.8 million square feet in the City, 2.06 million square feet in the West End and 749,420 square feet in the Docklands, according to real-estate-advisory firm DTZ Holdings PLC.

However, rising office rents, particularly in the West End, are forcing some companies to relocate elsewhere when their leases come up for renewal, says Mr. McCauley.

One company moving out as part of a wider cost-cutting drive is confectionery maker Cadbury Schweppes PLC, according to the firm's U.K. head of corporate relations, Katie Bolton. Cadbury Schweppes will leave its global headquarters in London's Berkeley Square in Mayfair next spring for an office in Uxbridge, near Heathrow airport. There, the global head office will be merged with the U.K. confectionery head office and the new regional office for Britain, Ireland, the Middle East and Africa. While Ms. Bolton declined to comment on how much money the firm hoped to save, there has been speculation that Cadbury Schweppes's rent in Mayfair was set to double to more than £100 per square foot a year.

Nevertheless, the strength of London's economy is expected to keep the office market buoyant. London's growth is being driven by the strong performance of the financial sector, along with an expected rise in financial and business-services employment: an additional 60,000 jobs are likely to be created over the next five years, says CB Richard Ellis.

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