The case for super prime offices

• The emphasis being placed on higher floors is paving the way for new record rents in skyscrapers
• Offices overlooking garden squares, or those with entertainment scale terraces, or with direct river views are also commanding rental premiums
• The demand for super prime offices demonstrates an opportunity for landlords to create more explicit rental tiers in their portfolios

For some, the perceived prestige of securing a penthouse office suite, or one that overlooks a garden square can be a crucial differentiating factor. A recent example in May last year was the record £250 per sq ft letting in Berkeley Square by Asian hedge fund, Steadview Capital Management. 

The space businesses occupy now sends a strong signal to potential employees about the culture of a business and the importance it places on the wellbeing of its staff. 

More demanding customers are helping to drive record prime rents in virtually all submarkets we monitor in London. These new super prime rents often sit well above prevailing headline averages. 

What does this mean for landlords and developers?

The concept of premiums being paid for higher floors is not a new one, however, the emphasis being placed on higher floors by potential customers and investors is paving the way for new record rents in submarkets dominated by skyscrapers. The same is true for space with entertainment-scale terraces, those overlooking garden squares, or those with direct river views. 

In Southbank for instance, we expect to see the upper floors of the Shard approach £100 per sq ft imminently, while penthouse office suites in the Square Mile’s towers are expected to continue climbing above £80 per sq ft. 

The emergence of this super prime demand in a quality-driven marketplace demonstrates an opportunity for landlords to create more explicit rental tiers in their portfolios. Longer term, we expect this market to become more prominent as it establishes itself as a tier above the traditional “prime” market. 

Defining the super prime premium

We’ve looked at just over 26,000 rental deals since 2004 in order to quantify these rental premiums. We found that the average super prime premium in the West End stood at £16 per sq ft during 2019, while in the City, the figure was  lower at £7.90 per sq ft. These translate into rental premiums of 16.6% in the West End and 22.6% in the City. 

In the West End, these super prime premiums are typically for offices with outside terraces, or for space on squares, while in the City, it’s typically higher floors and penthouse suites in skyscrapers that command the highest premiums. 

30% of super prime deals in the City are for space between 5,000 and 10,000 sq ft, while the biggest segment of the West End market (52%) is sub 5,000 sq ft. Interestingly, at 68%, the City accounts for the vast majority of super prime office leasing deals registered over the last 15 years, with the remaining being in the West End. 

Highlighting the growing popularity of super prime offices is the fact that historically this top tier segment of deals has accounted for just 2% of leases annually; however during 2019, the number of super prime lets stood at 4.7%, albeit this apparent divergence has perhaps been exaggerated by the supply squeeze in the market.

An investment premium too?

From an investment perspective, the ability to definitively achieve higher rents for top floors, or those with substantive entertainment-scale terraces, significantly contributes to driving value and ultimately the returns from an asset.

Furthermore, with workplace wellbeing and amenity provision rapidly becoming a critical differentiating factor for businesses, as evidenced by our London Landlord and Investor Survey, securing assets that offer a good view may start to drive greater returns for investors, especially as we know some businesses are willing to pay higher rents for the best views.

A point of view: quantifying the vista premium

Premiums are being sought and achieved for good views, typically above levels 6-7 in districts with tower clusters. 

Clearly good views are subjective, but in densely packed areas of Central London, having a good view is something businesses are increasingly willing to pay for. 

For instance, in and around the Tower of London, for office space that has clear and unobstructed views of the historic structure built in the 11th century, rental premiums of up to £5 per sq ft are not uncommon. 

These vistas are a highly sought commodity and with workplace wellbeing quickly becoming central to business operational strategies, being able to provide staff a good view is becoming an amenity in itself.

As a result, it’s not surprising to see developers working hard to ensure buildings, especially low-rise developments, are able to maximise not only natural light, but also attractive views as they jostle for space in a crowded urban landscape.