Taller Is Better as Bold London Skyscraper Bets Pay OffNeil Callanan
In the City of London office market, fortune favors the bold.
Rents for skyscrapers with nicknames like the Walkie Talkie and Cheesegrater rose faster than the rest of the financial district in the last three years, rewarding developers who started construction at a time when the economy was shrinking.
Those who took the risk are benefiting from a surge in demand that’s outstripping new space coming onto the market. The premium paid for offices in the towers compared with average City space has risen to 8.3 percent from 4.5 percent in January 2011, when construction on the Walkie Talkie and Cheesegrater began, according to data compiled by broker Knight Frank LLP.
“Skyscrapers achieve premium rents as the offices become part of a firm’s marketing,” said James Roberts, head of commercial research at Knight Frank. “There is the wow factor of taking a client into a meeting room where you enjoy panoramic views of the city.”
The superior performance of the office towers shows that the vertical transformation of the City that began a decade ago is back on track. The financial crisis interrupted a plan for a cluster of distinctive skyscrapers on the eastern edge of the City of London starting with the Gherkin at 30 St. Mary Axe, which opened 10 years ago last month. Developers postponed and canceled projects over the following three years as rents fell by almost a third and struggling banks reined in financing.
Rents in the financial district’s towers climbed by 13.6 percent from January 2011 through March this year to 65 pounds ($90) a square foot, Knight Frank estimates. That compares with a 9 percent gain to 60 pounds in the rest of the City. In Mayfair and St James’s, the world’s most expensive area to lease office space, rents rose 11 percent to 100 pounds a square foot.
The U.K.’s improving economy prompted companies to lease 7 million square feet (650,000 square meters) of office space in the City of London in 2013, the most in 13 years. Rents have risen 4 percent in the towers and 9 percent in the financial district in the year through March, according to Knight Frank. That compares with a 5 percent gain in the low-rise neighborhoods of Mayfair and St James’s.
More than half of the 47-story Leadenhall Building, known as the Cheesegrater, has been leased ahead of its completion in June at rents of as much as 72.50 pounds a square foot, according to British Land Co., which is developing the building in a venture with Oxford Properties Group Inc.
Companies “want to occupy iconic buildings that their staff will be excited to be in and that are recognizable, not just in their own city but on the global stage,” said Paul Burgess, Head of London Leasing at British Land.
Land Securities Group Plc and Canary Wharf Group Plc have agreements with tenants for almost 90 percent of 20 Fenchurch Street, the 509-foot (155-meter) Rafael Vinoly-designed skyscraper known as the Walkie Talkie.
“The U.K.’s economic rebound has encouraged firms to plan for a future that involves headcount expansion,” Roberts said. “There is an expectation that office supply will quickly come under pressure this year.”
About 2.5 million square feet of space that’s not for a specific tenant is under construction in the City, Roberts said. That’s less than the 3.3 million square feet of newly-built space taken up by companies in the last 12 months.
Bloomberg LP, the parent company of Bloomberg News, is constructing two 10-story office buildings between the Bank of England’s headquarters and St. Paul’s Cathedral. Bloomberg will occupy one of the properties.
Henderson Global Investors Ltd. won approval this year to build a London office complex with a tall building nicknamed Gotham City and W.R. Berkley plans to self-fund the construction of a glass tower dubbed the Scalpel.
Brookfield Office Properties Inc., lower Manhattan’s largest office landlord, plans to develop towers at two sites near Liverpool Street rail station: Principal Place and 100 Bishopsgate.
The Pinnacle, slated to be the tallest tower in the City of London, may be revived this year after construction was halted in 2012, Peter Rees, the district’s former planning officer, said in an interview in March.
“There is a will to go forward,” he said.
The strong skyscraper market may benefit the holders of debt backed by the Gherkin, who hired Deloitte LLP to take control of the building on April 24. Such a move often precedes a sale as lenders try to recoup funds. The tower is fully occupied, according to Evans Randall Ltd., the London-based company that bought the property with a fund managed by Germany’s IVG Immobilien AG for 600 million pounds in 2007.
The way the Gherkin’s 2007 purchase was funded contributed to the default and the eventual decision by debt holders to put the building into receivership. Part of the loan that IVG’s fund used to buy its share of the building was in Swiss francs, which have gained about 67 percent against the pound over the last seven years.
As the amount of the loan increased in pound terms, it breached rules on how much debt could be held against the property. IVG, once Germany’s biggest property company, last month agreed to be taken over by its creditors.
A decade ago, it was the Gherkin that “set the scene” for the new wave of skyscrapers, Robin Partington, who led the Foster + Partners team that designed the tower, said in an interview. “It certainly shifted a mindset for the skyline of London.”
The Gherkin opened April 27, 2004 and was developed by Swiss Re Ltd., the world’s second-biggest reinsurer. The Zurich-based company was “very sensitive to the issue” of constructing a tower, though it “felt very strongly that a tall building in London was an appropriate solution,” said Partington, who now heads his own London-based architecture company.
“It put them on that site smack bang in the middle of the insurance district,” he said. Representatives of Swiss Re, which sold the tower in 2007, declined to comment.
More than 35 kilometers of steel was used in the construction of the 180-meter-tall Gherkin, which is more than three times the height of the Niagara Falls, according to the building’s website. The tower officially opened in May 2004.
Getting the Gherkin nickname meant the “public taking what you’re doing to heart,” Partington said. “It’s a term of endearment.”