London commercial rents now at 1991 levels

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Irish homebuilder Menolly has been caught up in the collapse of the rental market in the City of London, which could see almost 20pc of offices empty by next year.

The City of London now has enough empty offices to hold two-thirds of Canary Wharf - the docklands area developed in the 1980s to lure investment bankers. About 9m sq ft are available in the City and that may climb to 12m by the end of 2009, according to CB Richard Ellis, the biggest commercial property broker. Almost 19pc 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 €168m. The building has no tenants. “Supply way exceeds demand,” he said.

Canary Wharf was perceived “as a complete threat” said Colin Hargreaves, who leases offices in London for Jones Lang LaSalle. 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.

Hammerson’s tower at 60 Threadneedle St is an eight-story building with a 6,000 sq ft reception area, art-deco elevators, roof gardens, views of the Bank of England, and no tenants. About 25pc 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.

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 115m sq ft of office space, compared with 15m at Canary Wharf, according to Jones Lang LaSalle.

The credit crisis caused British Land to delay a development last year at 122 Leadenhall, nicknamed the “Cheesegrater,” which would have been the area’s tallest building, at 738ft.

British Land 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.

British Land expects to complete the 586,000 sq ft Ropemaker tower in the third quarter. About 38pc 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.

UBS AG, the biggest Swiss bank by assets, and Canada-based Oxford Properties haven’t secured tenants for Watermark Place, a 525,000 sq ft redevelopment of a former British Telecom headquarters on the Thames. It’s scheduled to be completed later this year.

The 445,00 sq ft Walbrook development from Minerva, due to be completed this year, has no tenants.

JPMorgan Chase, the biggest US 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 €265m 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, the world’s largest money manager for institutions, became the first tenant of the new Canary Wharf in August 1991. HSBC, Lehman Brothers and Citigroup also moved in. “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 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.

While Morgan Stanley plans to give up 345,000 sq ft at Canary Wharf’s 20 Cabot Square next year, Moody’s, State Street, KPMG and Fitch Ratings are due to occupy about 1m sq ft 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?” asked Peter Damesick, head of UK research at CB Richard Ellis. “I don’t think anybody’s got a definitive answer,” he said.

(Bloomberg News)