MAYFAIR and St James's just aren't big enough for all the companies that want a piece of London's most expensive neighbourhoods. Many are now settling for less prestigious city-centre addresses, creating new hot spots in the office-property market.
Buildings are sprouting up in once rundown Victoria and King's Cross, a former red-light district, as developers expand the area that commands the world's highest office rents.
Blackstone Group bought a property about a half mile from St James's Square to profit from a squeeze caused by conversions of offices into luxury homes. Land Securities Group is investing £2bn (€2.4bn) in Victoria.
The construction push comes as older workplaces in St James's and Mayfair, many built as townhouses, are turned back into homes to profit from soaring prices.
Hedge funds and private-equity firms are taking most of what's left, accounting for 55pc of new office leases in the districts this year, according to agents Cushman & Wakefield.
"When you see occupiers becoming more transient because of that lack of supply, it creates opportunities on the fringe of historic prime areas to drive exponential rent growth," said James Lock, managing director at Blackstone's real- estate unit.
While there are no precise boundaries for the West End, it's usually considered the central business area west of the City of London financial district. It includes the neighbourhoods of Mayfair, Soho and St James's and tourist attractions such as Buckingham Palace, the theatre district and the bustling Piccadilly Circus commercial intersection.
Developers are seeking to exploit demand for larger and more modern offices in central London with access to transport links. Rents are rising throughout the West End's fringes, according to Knight Frank. In Mayfair and St James's, home to Europe's largest concentration of hedge funds, they average £95 a square foot, unchanged from a year earlier.
In Victoria – a gritty bus and rail hub between St James's and Belgravia which Mayor Boris Johnson has earmarked for revival – Land Securities' projects include the Zig Zag Building, an office and retail complex with an undulating facade on Victoria Street.
The UK's largest real-estate investment trust also refurbished a building across the road with about 200,000 square feet of offices for tenants, including retailers Jimmy Choo and John Lewis.
Rolls-Royce agreed to lease 37,120 square feet of office space on two floors of Land Securities' 62 Buckingham Gate building a few blocks away, the London-based developer said.
"What's great about Victoria is that we have sites that can accommodate buildings with floor-plates of 20,000 square feet or more," said Kaela Fenn-Smith, Land Securities' head of leasing.
American Express, Google and Microsoft already occupy modern buildings in Victoria near strips of offices built nearly half a century ago mostly to accommodate government bureaucrats.
Land Securities is tearing down 1960s- and 1970s-era buildings to create the type of space companies desire these days, Fenn-Smith said.
Land Securities' plans are "going to completely change the perception of Victoria" from a tenant's perspective, Mr Lock said.
Blackstone sees an opportunity in the Adelphi Building on the Strand, a street known for theatres and its proximity to Trafalgar Square. It's seeking at least £55 a square foot for the lower three floors and more on higher levels of the 13-storey tower overlooking the River Thames.
The New York-based firm, the biggest manager of private- equity property funds, plans to spend £25m refurbishing the Adelphi to attract tenants whose leases are expiring in Mayfair and St James's. It's also trying to get technology, media and telecommunications companies looking for bigger spaces, according to Mr Lock, who leads Blackstone's UK real-estate purchases.
Offices at nearby Soho Square, a favourite of technology and media companies like 21st Century Fox, go for £65 a square foot, according to Mr Lock. Workplaces on the Strand "can now accommodate those sort of rents," he said.
Tenants occupying 26 million square feet of central London offices have the option to move by the end of 2016, according to Mr Lock. Meanwhile, demand for central-London office space has risen 13pc from a year earlier, broker Jones Lang LaSalle said in a July report.
As leases expire, companies looking for new space will have to consider districts on the edges of the best West End neighbourhoods. Options are limited because vacancy levels in Mayfair, Soho and St James's were about a quarter below the long-term average at the end of June, broker Knight Frank said in an August report.
King's Cross and Paddington are among areas on the edge of the West End set to benefit from better transport links such as Crossrail, a high-speed train line that will link Heathrow Airport to the Canary Wharf financial district, Deutsche Bank researchers said.
British Land bought offices, stores and land near Paddington Station, the terminus of Heathrow Express trains, in July for £470m.
The site, about 1.5 miles from Mayfair, will give the developer an annual yield of 6.2pc when fully leased, chief executive Chris Grigg said on an investor call in July.
That compares with a 3.5pc yield for offices in prime West End areas, broker Savills said last month. Yields for the best UK property nationwide fell to 5.66pc on average in August, the lowest in more than five years, Cushman & Wakefield said.
"It's those larger floor-prints which really make a difference," Grigg said in July.
British Land, the UK's second-largest REIT, also owns Regent's Place, a development less than a mile from Oxford Street, where rents are more than £60 a square foot. That's an increase of more than one fifth in less than two years.
Developers betting on the expanded West End will face mounting competition from new projects in the City of London, many offering cheaper rents and targeting the same technology, media and telecommunications companies. Amazon.com chose to locate south of Farringdon, on the City's western edge, where rents are about £48 a square foot.
Farther east is London's emerging technology hub nicknamed "Silicon Roundabout" on Old Street. Derwent London, a REIT focused on central London, is tailoring a 290,000-square-foot office complex to tech firms with construction set to begin next year.
Google opted for the West End's northern edge in King's Cross, buying 2.4 acres of land that's part of a larger development by King's Cross Central near the Eurostar rail link to mainland Europe.
The owner of the world's largest search engine is building its new UK headquarters on the site about 1.5 miles northeast of Oxford Street.
Tenants "are drifting east from the West End," enticed by cheaper office space neighbouring companies with global brands like Google, said Guy Grantham, a Colliers International director in London.
"We were expecting mostly media and technology tenants, but we're seeing occupiers from the legal sectors and beyond" consider King's Cross, he said.
Rents for the best buildings in King's Cross are forecast to rise more than 20pc to about £65 a square foot by 2016, according to Colliers.
"These peripheral locations people talk about will no longer be peripheral," said Mike Prew, a Jefferies Group analyst in London. "The developers of King's Cross, now that it's been completely repositioned, they will make a fortune," he said. (Bloomberg)