Fear over double occupancy cost

Firms about to take on new City property might want to take a long look before they leap.

While estate agents are busily talking up the market, the more bearish analysts forecast that the uncertainty in global financial markets and the threat of deeper recession early next year, could have a major impact on demand and rents. Reason enough to wait before striking a deal.

Rumours abound of firms postponing planned moves – with US outfits Shearman & Sterling and White & Case understood to be among them.

The difference between now and the slump in the early 1990s is that this time tenants are more likely to feel the pinch before landlords, due to an unprecedentedly high level of pre-let space.

This totals some 10 million square foot, and is shifting financial liabilities onto occupiers, according to property consultants APR.

Some are trying to sub-let their new space in order to fend off a costs squeeze. But if conditions deteriorate, then they may fail both to sub-let the new space and to re-assign their old premises.

A double occupancy cost in a recession results in a pressing need to cut costs.

"If they can't get out of their pre-lets, they've got to sack more staff," says Paul Ives, head of research at APR.

"My advice to tenants would be to hold off from taking on expensive pre-lets if they can," Ives adds. "There's more vacant space available than the agents are letting on.

"We reckon there's been about 200,000 square feet of vacant new property completed in the last three months alone, and half a million over the last 12 months."

There are about 30 City and London law firms planning to take new space, according to APR.

Tenants who do have to move must first ensure they take no more space than they need, and then quantify and fix their property liabilities, says Colin Davey, property partner at Nabarro Nathanson.

Nabarros followed its own advice in an unusual deal with Land Securities recently, when it pre-let its 120,000 sq ft future headquarters at Theobalds Road, at £27.50 per sq ft.

The 15-year tenancy in Holborn involves pre-agreed rental step-ups, rather than the usual upwards-only rent reviews, which will ensure the firm knows its total property costs. "You've got to think long-term," says Davey.