I would like to find out the range and key determinants of rental
levels for the most expensive office buildings currently being
marketed or about to be marketed in the City of London, i.e. what
would a typical smaller City tenant with deep pockets (say, a
20-person hedge fund or the 20-person UK office of an American law
firm) pay in terms of rent per sq metre and what would really make the
difference between an office building that costs x per sq metre versus
y per square metre?

A good answer could be, for instance:

1. A 500-word summary of your answer to my question, based on
everything you have read.

2. A list of the 10 most expensive (most "desirable" could also be
interesting) office buildings in the City, their approximate rental
level (or the typical range of rentals within the building) and a few
bullet points summarising what key points seem to justify their high
rental level (according to letting agents, press comments, their web
sites or whatever).

3. Specific examples of anything INSIDE the buildings which makes a
big difference to rental levels - e.g. once you have taken account of
the location and the exterior, are there any examples of buildings
justifying high rents because of unique working environments,
services, features, mix of office tenants...?

4. Briefly annotated links to your sources - e.g. City property
surveys produced by letting agents or articles from the specialist
property press.

---

Clarification of Question by johnadam-ga on 05 May 2005 06:06 PDT

selling, modern - the outside is designed, but not yet the inside!

London?s West End appears to be the strongest office market in Europe,
and it is no surprise that rents are high. Overall, Central London
rents rose between 3% and 4% on a year-over-year basis in the March
quarter, a strong recovery from the double-digit declines common in
late 2002, 2003, and early 2004, with the strongest growth in the West
End, Southbank, and Midtown markets. Since the highest rent in the
West End is considerably higher than the top rents in the City,
Midtown, and Southbank, we?ll concentrate on the West End from here on
out.

The recent recovery in office rates has created a two-tier market, in
which trophy buildings command a significantly higher price than
nontrophy buildings. While rent on prime space in the West End has
increased a high-single-digit rates over most of the last year,
including 7% in the March quarter, top rents jumped at least 15% in
each of the last four quarters. However, that discrepancy was
considerably larger in the September and December quarters, and if
trends continue, it should continue to decline to normal levels over
the next few quarters.

In 2004, rents of around £860 per square meter were charged in prime
buildings like Curzon Square 25-35 Park Lane
(http://www.cityoffices.net/properties/curzon-square-25-38-park-lane-london.cfm),
10 Grosvenor St. (http://www.cityoffices.net/properties/10-grosvenor-street-nos-9-13-london.cfm),
and 40 Berkeley Square
(http://www.cityoffices.net/properties/40-berkeley-square-london.cfm).
You can?t get that price today, but the top buildings still fetch a
premium to other space with similar amenities but not as much cache.
In the first quarter of 2005, the top West End rent in new space was
£700 per square meter at 6 Chesterfield gardens, a level driven by
competition, and one that may not be sustainable. Still, rents in
Mayfair and St. James areas continue to top those in other portions of
the West End. In the Victoria section, rent at 16 Palace St.
(http://www.cityoffices.net/properties/cardinal-place-building-three-16-palace-street-london.cfm)
was about £540 per square meter. The range of £500 to £560 per square
meter seems to be the high end for high-quality space in low-rise
buildings.

So why does 10 Grosvenor street warrant a 59% premium to rents at 16
Palace Street? There are several reasons why some space goes for more
than others.

·	Location.
·	Newness of construction.
·	Ownership.
·	Building size/image.
·	Amenities


Location, of course, is the most important factor. Mayfair and St.
James rents are higher than rents in Victoria and Soho simply because
of the neighborhood.

Newness of construction helps differentiate between similar buildings
in similar areas, but it alone can?t drive rents. The building at 16
Palace Street was completed in 2004 and is quite striking, yet it
still can?t charge the kind of rents you can get at 10 Grosvenor St.,
which was completed nearly two years earlier.

Ownership is also important. Secondhand space goes for less than
firsthand space, another reason why new buildings tend to be able to
charge more for rent.

When it comes down to who can charge a Godzilla-size rent, you have to
consider whether it is a Godzilla-size building. All else being equal,
a 40-story building can charge more than a 5-story building. Yet
skyscrapers in center City like the City Point
(http://www.cityoffices.net/properties/citypoint-ropemaker-street-london.cfm)
and the relatively new (2003) 30 St. Mary Axe
(http://www.cityoffices.net/properties/30-st-mary-axe-london.cfm).
routinely command rents of no more than £500 per square meter.

Business and technology amenities are not the answer. Most new
construction offers all the amenities any reasonable tenant could
want, and a lot of that space is built on spec, so the tenant can make
its wishes clear in advance. Most of the top buildings throughought
Central London have good security and attentive staffing, so that is
also not the answer. The top buildings like to refer to Grade A space,
but the definition of Grade A varies depending on whom you ask, and
can in come cases mean nothing more than that the building has air
conditioning. There is plenty of Grade A space fetching £500 per
square meter in the center City.

The only features that distinguish the top-end buildings are location
and newness of construction, with newness of vastly less importance
than the prime location.

Summary points:

·	Based on current market prices and pricing trends, the most
important indicator of the rent a building can charge is, as it always
has been, location. Mayfair is obviously the tallest hat in town.
·	A tenant looking for prestigious, high-end space can expect to pay
up to £700 per square meter for trophy buildings in the Mayfair or St.
James area.
·	That same tenant could save £150 to £200 per square meter by moving
out of Mayfair or St. James to a less-ritzy portion of the West End.
·	That same tenant could save more than £200 per square meter by
moving out of the West End to the City, Midtown, or the Docklands,
where there is plenty of high-quality space available.

The 10 most expensive properties are, I hate to admit it, impossible
to determine. This is simply because many of the buildings with the
highest rents are completely let out and no pricing data is available.
What I have done is listed 10 buildings with very high recent rental
prices or seeking high rents. Of the ?prime? buildings, those where
space is likely to net £700 or more per square meter, there aren?t
more than a dozen buildings that even have space available, and
probably fewer than that.

FOR RENT: 33 King St., £870 per square meter. Rumored deal for £990
per square meter, a price equal to the record rent charged at that
space in 2000.

Curzon Square, £860 per square meter late last year.

10 Grosvenor St., £860 per square meter late last year.

40 Berkeley Square, £860 per square meter late last year.

20 King St., £815 per square meter last last year.

FOR RENT: Stirling Square, £735 per square meter.

6 Chesterfield Gardens, £700 per square meter in the March quarter.

1 Hanover St., £685 per square meter late last year.

Arena, 52 Conduit St., £600 per square meter, late last year.

Belgrave House, £600 per square meter, late last year.

For details on different properties, check out
http://www.cityoffices.net/uk/london/index.cfm. The site shows
available space and photos for most of the properties and will also
help you determine when some of these buildings were constructed.

For links to most of the other research I considered, go to
http://www.rebuz.com/Directory/real-estate-market-research.htm, which
will help connect you to the research of a number of large real-estate
companies.

Other sites I accessed include:

http://www.struttandparker.co.uk/uploads/publications/centrallondonofficesurvey-jan2005.pdf

http://www.cluttons.com/

http://www.colliers.com/Content/Repositories/Base/Markets/UnitedKingdom/English/Market_Report/PDFs/OfficesresQ4.pdf

http://www.propertymall.com/profile/3152

---

Request for Answer Clarification by johnadam-ga on 05 May 2005 11:54 PDT

This would be a fantastic answer except that my question was
specifically about the City and I really do need to know about the
City rather than the West End.

Could you please answer the precise question as best you can before
8.30am London time tomorrow (6th May).  Given the amount of work you
have clearly put in already and the fact that I can use a little of
what you have given, I do not mind if there is less detail - e.g. top
5 rather than top 10 most expensive buildings in the City.

Thanks!

---

Clarification of Answer by vercingatorix-ga on 05 May 2005 12:27 PDT

Please clarify, as I want to make sure I understand you.

You don't need the most expensive buildings in the entire city of
London. But you do need the most expensive buildings in the City
section of London.

V

---

Clarification of Answer by vercingatorix-ga on 05 May 2005 13:39 PDT

Sorry about the mix-up. I thought you wanted the most expensive
buildings in the entire city. I believe I can make your deadline,
though I cannot guarantee it. I spent much of my day assembling that
answer, and I have commitments this evening. Fortunately, I'm not in
Europe.

If you don't mind, I'll use my last answer as a template and make
changes when necessary. So if you see some repetition in my
information and phrasing, don't be alarmed.

V

---

Clarification of Answer by vercingatorix-ga on 06 May 2005 08:25 PDT

Here's my revised answer containing data about London's central City.
Again, to clarify, I did not simply rewrite everything. I took my last
answer, cut out much of the West End-specific material, and updated
with City information where necessary. I hope this meets your needs.

V


Overall, Central London rents rose between 3% and 4% on a
year-over-year basis in the March quarter, a strong recovery from the
double-digit declines common in late 2002, 2003, and early 2004, with
the strongest growth in the West End, Southbank, and Midtown markets.
The City of London posted lower growth, with rents up in the
neighborhood of 2% year over year. That slower growth makes sense, as
the vacancy rate is about 12%, the highest of any major London area.

The top rent in the City in the March quarter was £500 per square
meter at the top floor of City Point
(http://www.cityoffices.net/properties/citypoint-ropemaker-street-london.cfm),
which is about as high as rents get in grade A space outside of the
West End. Other buildings currently commanding very high rents are
Plantation Place (http://www.cityoffices.net/properties/plantation-place-1-plantation-place-fenchurch-street-building-31-35-fenchurch-street-london.cfm)
and 30 St. Mary Axe (http://www.cityoffices.net/properties/30-st-mary-axe-london.cfm).
The consensus opinion on the City?s prime rent (the highest rent
likely to be collected on 1,000 square feet of Grade A space in the
best locations) seems to be between £480 per square meter and £500 per
square meter. This rent still trails the rents charged in places like
Victoria in the West End, not to mention Mayfair and St. James.

City rents are not likely to much rise until next year, when the
market has had a chance to absorb some of the outstanding space. At
the end of March, there were more than a half-dozen Grade A parcels of
more than 10,000 square feet, supply that will take some time to be
leased.

The recent recovery in office rates London-side has created a two-tier
market, in which trophy buildings command a significantly higher price
than nontrophy buildings. While rent on prime space in the West End
has increased a high-single-digit rates over most of the last year,
including 7% in the March quarter, top rents jumped at least 15% in
each of the last four quarters. However, that discrepancy between
top-grade space and lesser space is far smaller in the City than it is
in the West End, probably because of the availability of large Grade A
parcels.

So why does a property like City Point command a higher rent than
other City buildings? There are a number of potential reasons:

·	Location.
·	Newness of construction.
·	Availability/ownership.
·	Building size/image.
·	Amenities

Location, of course, is always an important factor. West End rents are
high simply because of the neighborhood. However, rents in the City
don?t seem to vary as much because of location. Of course, there are
exceptions. Some tenants pay vastly higher rents than others in the
same buildings because of those buildings? proximity to locations
important to the tenant. Of course, a Grade A building surrounded by
other high-quality buildings is going to be more desirable than a
Grade A building surrounded by lesser edifices. But overall, building
location does not seem to be as large a factor within the central City
as it is in other areas.

Newness of construction helps differentiate between similar buildings
in similar areas, but it alone can?t drive rents. Times Square at 160
Queen Victoria St. (http://www.cityoffices.net/properties/times-square-west-block-160-162-queen-victoria-street-london.cfm)
and the building at 95 Queen Victoria St.
(http://www.cityoffices.net/properties/walker-house-95-queen-victoria-street-london.cfm)
were both completed in January 2003, yet 95 Queen Victoria St.
commands rents of higher than Times Square can collect. The priciest
rental of the quarter occurred at City Point, which was built in 2001.

Availability is also important. If a Grade A building has only 1,000
square feet of space available, it is likely to drive a harder bargain
than a building with six 1,000-square-foot blocks. However, high
prices were paid for large blocks at 51 Lime St.
(http://skyscraperpage.com/gallery/showphoto.php?photo=54587&papass=&sort=1)
and 30 Gresham St. (http://www.cityoffices.net/properties/30-gresham-street-blossoms-inn-london.cfm),
so prime buildings can still charge prime prices even if they have a
lot of space available. Ownership also plays a role. Secondhand space
goes for less than firsthand space, another reason why new buildings
tend to be able to charge more for rent.

When it comes down to who can charge a Godzilla-size rent, you have to
consider whether it is a Godzilla-size building. In the City in
particular, size matters a lot. All else being equal, a 40-story
building can charge more than a 5-story building. Tenants pay for the
height and the image. Skyscrapers like the City Point and the
relatively new (2003) 30 St. Mary Axe command among the highest rents
in the central City. There are only two or three true skyscrapers in
the City, but about six more are scheduled to begin construction by
2007. Expect those buildings, like the Minerva Tower, London Stock
Exchange Tower, and Heron Tower, to set the new standard for City
rents when they hit the market starting in 2008.

Business and technology amenities are not a major driver of rents in
most cases. Most new construction offers all the amenities any
reasonable tenant could want, and a lot of that space is built on
spec, so the tenant can make its wishes clear in advance. In addition,
Grade A refurbishments projects are very common these days. Most of
the top buildings throughought Central London have good security and
attentive staffing, so that is also not the answer. More relevant is
whether or not the space is considered Grade A space, but the
definition of Grade A varies depending on whom you ask. Grading often
takes into account efficiency of design. In most cases, Grade A means
that a building is relatively new and/or contains all the latest
amenities. In come cases, Grade A means nothing more than that the
building has air conditioning.

In the City, the features that most distinguish the top-end buildings
seem to be building size and image, followed by location and newness
of construction. Availability can temporarily increase or decrease
rents, but those changes are not sustainable and often have little to
do with the overall quality or desirability of a property.

Summary points:

·	Based on current market prices and pricing trends, the most
important indicator of the rent a building can charge in the City is
size and prestige.
·	A tenant looking for prestigious, high-end space can expect to pay
up to £490 per square meter for trophy buildings in the City.
·	That same tenant could save £50 to £150 per square meter by settling
for a smaller or older building with similar amenities.

The 10 most expensive properties are, I hate to admit it, impossible
to determine. This is simply because many of the buildings with the
highest rents are completely let out and no pricing data is available.
What I have done is listed 10 buildings with very high recent rental
prices or seeking high rents. Of the ?prime? buildings, those where
space is likely to net £450 or more per square meter, there aren?t
more than a dozen buildings that even have space available, and
probably fewer than that.

City Point, £538 per square meter, top floor, March quarter.
51 Lime St., £495 per square meter, March quarter.
30 St. Mary Axe, £495 per square meter and £468 per square meter,
March quarter (building not yet completed).
30 Gresham St., £495 per square meter, March quarter.
Plantation Place, Fenchurch Street, £484 per square meter, March quarter.
Aviva Tower, 1 Undershaft, £484 per square meter, late last year.
95 Queen Victoria Street, £463 per square meter, March quarter.
25/31 Moorgate, £457 per square meter, March quarter (36 months
rent-free, probably inflated price).
Times Square, 160-162 Queen Victoria Street, £425 per square meter,
late last year, £377 per square meter, March quarter.
Alder Castle, £377 per square meter, March quarter.

For details on different properties, check out
http://www.cityoffices.net/uk/london/index.cfm. The site shows
available space and photos for most of the properties and will also
help you determine when some of these buildings were constructed.

For links to most of the other research I considered, go to
http://www.rebuz.com/Directory/real-estate-market-research.htm, which
will help connect you to the research of a number of large real-estate
companies.

Other sites I accessed include:

http://www.struttandparker.co.uk/uploads/publications/centrallondonofficesurvey-jan2005.pdf

http://www.colliers.com/Content/Repositories/Base/Markets/UnitedKingdom/English/Market_Report/PDFs/OfficesresQ4.pdf

Are you buying - or are you selling ?

Is it Modern or Classic that you are buying/selling ?

Thanks - very thorough!