Select Committee on Transport, Local Government and the Regions Memoranda

Memorandum by Insignia Richard Ellis (TAB 37)



  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.


  Market evidence shows that tall office buildings in London meet particular requirements of two distinct groups of occupiers:

    (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.


  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 transport?

  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 position.

  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 needs.

  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.


  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 buildings.

  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 class city"

  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 that:

    —  High buildings are popular with smaller occupiers.

    —  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 buildings.

  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 building.

  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 City.

  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 of agglomeration.

  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 activities.

  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 optimal accommodation.

  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.

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Prepared 22 January 2002