Shard Skyscraper Adds Offices to London Stung By Slowdown
The Shard’s owners were so optimistic about rising rents in 2010 that they bought out Transport for London’s contract to rent about a third of the skyscraper. They have yet to find a new tenant for the 72-story tower’s offices.
Sellar Property Group Ltd. and the Qatar Central Bank anticipated rents of as much as 70 pounds ($110) a square foot, among London’s highest, when the subway-system operator was paid to break its lease. Demand for prime office space in the capital has since tumbled and average rents in the nearby City of London financial district are about 55 pounds a square foot.
The Shard, western Europe’s tallest building at 1,016 feet (310 meters), is among five new skyscraper projects that will add about 3.8 million square feet (350,000 square meters) of prime space within a mile of the Bank of England. The amount of new and refurbished office space leased in London last year was the lowest in a decade amid the financial-services industry’s contraction and Europe’s lingering debt crisis, real estate broker Drivers Jonas Deloitte said in May.
Cutting rents “to the point where you’re generating customers, even if you have to steal them away” from rival landlords, “would probably be a good idea,” said Mark Thornton, a senior fellow at Ludwig von Mises Institute in Auburn, Alabama, who has researched the relationship between skyscrapers and recessions.
The Renzo Piano-designed skyscraper, named for its tapering icicle shape, took 12 years of planning and construction by Irvine Sellar, chairman of the London-based developer. His company owns 5 percent of the Shard, a mix of offices, shops, apartments and a Shangri-La hotel. The Qatar Central Bank owns 95 percent after buying into the project in 2009.
Sellar, 73, said he “wouldn’t want any one tenant to dominate the Shard” and predicted the entire tower will be leased by the end of 2014. “We are negotiating with various office occupiers for space well in excess of 100,000 square feet,” he said in a June 29 interview.
Sheikh Hamad Bin Jasim Bin Jabr al-Thani, Qatar’s prime minister, will today mark the building’s inauguration with Prince Andrew. Twelve lasers and 30 searchlights will beam out from the Shard at 10:15 p.m., illuminating London landmarks including Tower Bridge and the Houses of Parliament. The ceremonies will culminate with the Shard being lit from all sides, and the London Philharmonic Orchestra will perform American composer Aaron Copland’s classic “Fanfare for the Common Man.”
Construction began in March 2009 as London’s property market started to bounce back from the global financial crisis. After buying out Transport for London, Sellar predicted that the Shard’s completion would coincide with a shortage of prime office space in the city and rising lease rates.
Central London office rents have risen about 10 percent from that time through the first three months of this year. They remain 15 percent below their peak in 2008, according to data compiled by Investment Property Databank Ltd. Rents for the best space in the City of London financial district are about 55 pounds a square foot and about 95 pounds in the West End, Jones Lang LaSalle Inc. said in March.
Central London’s office vacancy rate fell to 5.4 percent from 5.8 percent through the first quarter of this year, according to Jones Lang.
Demand for even the best London space has turned “moribund of late,” Anthony Duggan, head of research at Drivers Jonas Deloitte, wrote in May. Some companies in the City are leasing second-hand space to cut costs, which “does little to instill optimism” for developers with nearly completed buildings, Duggan wrote.
The U.K. entered its second recession in three years in the first quarter. The central bank announced a program to boost lending last month and Bank of England Governor Mervyn King wants to increase the bank’s bond-purchase program to stimulate growth. Employment in London’s financial-services industry may fall to its lowest level in about 16 years, the Centre for Economics & Business Research Ltd. said May 9.
The amount of office space newly leased in the City last year fell 44 percent compared with 2010, according to Jones Lang. The 3.4 million square feet that was rented was the lowest amount since 2003, according to the Chicago-based broker. Financial-services companies accounted for a fifth of the space, less than half that of the previous year, Jones Lang said.
The Shard will increase the amount of newly built and still empty office space in London by about 15 percent to 4.6 million square feet, according to data compiled by Drivers Jonas Deloitte. When The Place, a 17-story building paired with the Shard, is completed next year it will add 429,000 square feet.
Sellar said he plans to develop another million square feet of property in the neighborhood on land he already owns. “I don’t want to be known purely for developing tall buildings,” he said. “I like doing things that are out of the ordinary.”
The Shard, together with The Place, will cost about 1.5 billion pounds to construct, including the purchase price of sites and interest on debt, Sellar said. They may be valued at 2.5 billion pounds on completion, he said.
The skyscraper has 44 elevators, 306 flights of stairs, 11,000 glass panels and a swimming pool on the 52nd floor. Starting in February, visitors will be able to see the sites of four other towers planned or under construction in the City from the observatory on The Shard’s top floor.
Aon Corp., the largest insurance broker, in November agreed to lease about a third of British Land Co.’s Leadenhall Building, known as the Cheesegrater. Land Securities Group Plc (LAND) and Canary Wharf Group Plc last month agreed to rent out 51,000 square feet at 20 Fenchurch Street, the office tower known as the Walkie-Talkie, to Markel International Ltd. It’s due for completion in 2014.
Construction hasn’t started on the 100 Bishopsgate tower near Liverpool Street station planned by Great Portland Estates Plc and Brookfield Office Properties Inc. Development of the Pinnacle, a 64-story office tower with a million square feet of space has stalled, according to Driver Jonas Deloitte.
The Shard, with 600,000 square feet of office space from the fourth to 28th floors, was developed in the area of central London least prized by office building buyers. The Southbank district, on the opposite side of the River Thames from the City, has the highest yields for commercial real estate, meaning investors pay lower multiples of the annual rent for property there than other central London areas, IPD and broker Farebrother Ltd. said June 14.
The Shard may nevertheless outperform the U.K. economy through 2014 because a lack of new office buildings in London may result in rents increasing in the next two years, Alan Carter, a real estate analyst at Investec Ltd., said by telephone.
“It may yet turn out to be in the right place geographically,” he said.
Carter said he thinks businesses will be willing to pay rents of 55 pounds a square foot or more for space in the building. Transport for London had agreed to pay 38.50 pounds a square foot.
Sellar, who made his first fortune selling flared jeans in the 1960s, said tenants will likely pay from 55 pounds to 75 pounds a square foot.
The Shard’s owners “may not be interested in long-term leases at 50 percent discounts,” said Thornton of the Ludwig von Mises Institute. “So they may not do that, even though that’s probably what they should do.”
Skyscraper economic models suggest developers compete to add floors to become a city’s most prominent building and that allows them to charge a premium, said Colin Lizieri, a real estate professor at Cambridge University.
Constructing extra floors is expensive and a developer “can go for something that is a prestige statement, which in the long run might not give them the financial rewards,” said Lizieri. “If somebody else then comes and beats you, then you’ve overinvested.”
Sellar said he’s confident that won’t happen.
“You’ve got the river facing it to the north and it will not be overshadowed by other buildings,” he said. The Shard “will stand in splendid isolation for a long time.”
To contact the reporter on this story: Neil Callanan in London at firstname.lastname@example.org.