Memorandum by Insignia Richard Ellis (TAB
1. ECONOMIC ARGUMENTS
The debate about appropriate policy for tall
buildings in London has been marked by disputes over the economic
justification for high rise office developments. Advocates and
opponents of such developments disagree over the need for more
high buildings to maintain and enhance London's "World City"
status in the global economy.
This submission to the Urban Affairs Sub-Committee
inquiry aims to clarify the issues regarding demand for office
space in tall buildings and the economic case for development
to meet that demand. The evidence presented draws upon ongoing
property market research at Insignia Richard Ellis and also specific
studies undertaken in connection with the planning inquiry into
the proposed tower development at 110 Bishopsgate in the City
of London and for the British Council for Offices Tall Buildings
Working Group. The Study for the BCO is part of a larger programme
of work, the report of which will be published in February 2002.
2. SOURCES OF
Market evidence shows that tall office buildings
in London meet particular requirements of two distinct groups
(a) Very large organisations seeking consolidation
of activities in a single building with efficient floorplates
for their operations. For such occupiers, the "high and fat"
building with floorplates of around 20,000 square feet or greater
can provide the most efficient property solution.
(b) Small to medium sized occupiers requiring
up to, say, 40,000 square feet, but often smaller amounts of space,
who want a combination of efficient, high quality accommodation
with location in a prominent, prestigious building. "Tall
and thin" towers with floorplates of, say, 10,000-15,000
square feet will be likely to meet the requirements of these occupiers.
In order to prosper as a "World City"
and global financial centre, London must offer businesses an adequate
choice of appropriate office space. The economic arguments for
tall office buildings therefore relate to the need to accommodate
the requirements of these occupiers and the disadvantages of inadequate
provision of the type of office buildings required.
3. TALL BUILDINGS
The case in respect of the largest office occupiers
seems straightforward. To the extent that towers are their preferred
solution, then a lack of these will inhibit efficient occupation
of office space by some very large office occupiers. Ultimately
this will impair the productivity and competitiveness of the businesses
affected. They represent an important component of London's economy
which must compete internationally.
It is important to recognise that the erosion
of business efficiency and competitiveness typically operates
at the margin. Some commentators argue that as there is no evidence
of London losing international companies because of a lack of
tall buildings, there is no economic imperative for building tall.
The fallacy of this view is illustrated if we ask what similar
evidence is there that London's competitiveness is adversely affected
by the state of its public transport system. Can we identify any
companies that have relocated to Frankfurt because of the state
of the Tube? If not, can we conclude that all is well with London's
The importance of the contribution that tall
buildings have made to meeting recent office floorspace demand
in Central London is highlighted by an examination of how the
requirements of the biggest occupiers have been met. An analysis
of the largest office lettings in excess of 200,000 square feet
since January 1998 in Central London shows that, over this period,
there were 24 office acquisitions in this size category. Canary
Wharf accounted for nine of these lettings, which were predominately
concentrated in units of excess of 500,000 square feet. Indeed,
out of eight acquisitions over 50,000 square feet, Canary Wharf
accounted for seven and all three in excess of 750,000 ft2
went to Docklands.
Of key interest in the context of this inquiry
is the extent of which these very large office requirements were
accommodated in tower buildings. If we define a tower building
as having in excess of 20 storeys, then eight out of the 24 acquisitions
over 200,000 square feet found a home in a tower building.
Two of these were in the City:
Swiss Re, 450,000 square feet in
the Swiss Re Tower, St. Mary Axe, EC3.
Simmons & Simmons, 236,000 square
feet in City Point, Ropemaker Street, EC2, where the solicitors
pre-let the lower floors of this refurbished building with the
smaller floors in the tower above going to multi-occupation.
The other six major acquisitions in tower office
buildings were in Canary Wharf:
HSBC Holdings, 1.1 million square
feet in 8-16 Cabot Square, a 42 storey tower office building.
Salomon Smith Barney, 628,000 square
feet in 25 Canada Square.
Citigroup, 294,000 square feet in
25 Canada Square.
Clifford Chance, 785,000 square feet
in HQ5, a 30 storey tower building.
Lehman Brothers, 1.1 million square
feet in HQ2, a 34 storey building.
Barclays Bank, pre-let of 650,000
ft² at BP1, 1 Churchill Plaza.
Tower buildings clearly play a central role
in Canary Wharf's market specialism in accommodating the needs
of very large office occupiers seeking consolidation of activities
under one roof in high quality accommodation. Given the development
constraints in the core areas of Central London, the ability to
develop big office buildings in Docklands has been critically
important for London's office market over recent years. It has
provided essential supply capacity for large office occupiers
and helped to contain rapidly escalating property costs to some
degree. Without this vital Docklands contribution, office shortages
in London would have been even more acute and rental levels even
higher, with severe adverse consequences for London's competitive
Predicting future demand for very large units
of office space which might be housed in tower buildings is difficult
with any precision. It seems reasonable to expect that the trend
of consolidation of activities into single, very large buildings
will continue. Currently in Central London there are over fifty
organisations occupying more than 400,000 square feet spread across
several buildings. Among these, some 16 could presently be counted
as candidates for substantial consolidation of accommodation over
the medium term. Several of these are already looking.
This is only a snapshot of potential requirements
for very large buildings. Over time business growth and the on-going
process of merger and acquisition will be likely to produce further
cases for potential consolidation, leading to requirements for
very large buildings.
Not all the very large office requirements that
can be envisaged as likely to emerge will want or need to be accommodated
in tall buildings. But, on the evidence of recent trends, it is
reasonable to expect that for certain occupiers involved, a tower
office will be the preferred and most efficient solution to their
It also needs to be accepted that, for certain
very large occupiers, their most preferred location may be in
a core Central London area, including the City, rather than Docklands.
An adequate choice of appropriate office space should include
adequate choice of location.
4. ECONOMIC ARGUMENTS
A second "pinch-point" in London's
office supply/demand balance in terms of demand for high rise
space in multi-let office buildings relate to small to medium
sized occupiers with requirements ranging from small offices of
a few thousand square feet to several floors. Such occupiers will
often pay a premium to be on the higher floors of the tallest
Multi-occupied towers in good locations have
shown enduring popularity with occupiers. This is reflected in
the market evidence of premium rents being achieved in tower buildings
on the upper floors. Multi-occupied towers had proved popular
whether built for multi-letting or adapted from former single
occupied towers, eg the NatWest Tower in the City.
In its 1998 report on "Tall Buildings and
Strategic Views", the former London Planning Advisory Committee
(LPAC) noted: "A particular concern amongst City agents consulted
for this Study was the perceived inability of the planning system
to deliver new, high office buildings specifically designed for
multi-occupation. They argue, correctly, that multi-occupied high
buildings in the City consistently attract international occupiers
prepared to pay a premium price for the benefits of image. It
could be argued that a shortage of 10,000-30,000 square feet floors
in new high buildings is a significant gap in the range of choice
which an international occupier might reasonably expect in a world
Nonetheless, LPAC and others have questioned
the economic need for such high buildings. In their view, desire
does not equal need: "nice but not necessary" is the
verdict on high quality tower offices.
This conclusion is at odds with the evidence
High buildings are popular with smaller
They attract premium rents.
High quality towers would be a positive
addition to the range of choice for London office occupiers and
would attract strong interest from the market.
The low vacancy rates and premium rents evident
in tower office buildings in the City can be taken as prima facie
economic evidence of strong demand relative to supply. Occupiers
would not pay higher rents in tower buildings if they did not
consider they derived real benefits from occupying space in tall
Underlying the "nice but not necessary"
judgement on tall buildings is the presumption that issues of
image and prestige can be dismissed as lesser preferences of office
occupiers on which planning policy need not place much weight.
The efficiency and flexibility of office accommodation are considered
much more important. However, this ignores the fact that for some
occupiers, the image and prestige of their office address serve
an important business purpose, alongside, for example, their spending
on advertising, PR and marketing.
Large occupiers in their own HQ building can
create their own image and use such buildings to make a corporate
statement as, for example, in the case of the new Swiss Re tower
in the City. In the context of the Central London market, small
occupiers face obvious difficulty in securing self-contained office
premises with "their own front door". In some locations
this would prove an excessively expensive option. Moreover, smaller
occupiers will often want more flexibility than is possible with
a self-contained property and will seek to gain prestige and image
from the prominence and status of large multi-tenanted buildings.
There is no reason to believe that some firms will not want a
combination of high quality space, good location and a landmark
The case for a tower building specifically aimed
at small to medium sized occupiers requiring up to about 40,000
square feet of floorspace was central to the debate in the planning
inquiry into Heron's proposed developed at 110 Bishopsgate in
The importance of small/medium sized office
occupiers within the City clusters relates to their significant
role in the networks and linkages that drive the dynamism of the
clusters of inter-related businesses in the City. This includes
acknowledgement of such factors as:
The contribution of small/medium
sized occupiers to economic and business diversity in the City.
Their role in the professional and
business service supply infrastructure for larger organisations
and each other.
Their inclusion of many new arrivals
by international businesses coming to the City, eg representative
bank offices, initial establishment by foreign law firms, new
financial business consultancies and so on.
Their inclusion of offshoots and
incremental expansions of larger organisations.
Arguably, large occupiers have greater locational
flexibility than smaller occupiers. Over the recent past their
choices have been increasingly "building-led" to locations
where they can acquire offices of the size, configuration and
quality, at a cost and within a time-scale that meets their requirements.
Hence big occupiers have dominated the pre-letting and occupation
of very large new developments not only in Docklands but in other
non-core locations around Central London as at London Bridge and
Paddington. By consolidating their activities in individual large
buildings, such occupiers can create their own internal economies
Smaller occupiers, on the other hand, rely much
more on external agglomeration economies and hence seek the benefits
of locations in the core areas of Central London amid a concentration
of inter-related business. They wish to be near the "heart
of things", within the interactive clusters of specialised
businesses that contain their clients, suppliers and complementary
Hence, for many smaller occupiers who have difficulty
finding appropriate office space in the City, relocating to Docklands
or a fringe location elsewhere in Central London is typically
not a viable option. For them, a City location is paramount to
the competitive operation of their business.
Thus, while Canary Wharf has come to play a
crucial complementary role to the City in terms of office supply,
it does not, as yet as least, offer the appropriate location for
the full range of occupiers. There remains a very large population
of smaller occupiers for whom a City or other core Central London
location is essential. For some of these, high quality, flexible
office space in a prestigious, prominent building will be their
Failure to include towers within the range of
choice for Central London occupiers will make it more difficult
for some businesses to find their ideal office space requirements.
As a result, at the margin, their longer-term competitiveness
may be adversely affected. The dynamics of London's "clusters"
and its "World City" economy could suffer.