Prime rents in both the City and West End office markets will return to growth again in 2010, following the correction seen in 2008 and much of 2009, says a report by a leading London-based real estate consultancy.

London-based Knight Frank said the upward trend reflects less than expected distress in the market in 2009, a significant recovery in demand recorded in the summer, the recent rally seen in the global capital markets, and the drop off in speculative development completions expected between 2010 and 2012.

Knight Frank has forecasted:

• City prime rents to rise by 4 per cent in 2010 to GBP44.00 ($70.5) per sq ft having fallen 21 per cent in 2009 to GBP42.50 per sq ft
• Between now and the end of 2013 city rents to increase by 37 per cent to GBP58.00 per sq ft
• West End prime rents to rise by 3 per cent in 2010 to GBP67.00 per sq ft having fallen 30 per cent in 2009 to GBP65.00 per sq ft
• Between now and the end of 2013 West End rents to increase by 42 per cent to GBP92.50 per sq ft

The market has not seen as great a level of sub-let space return to the market from tenants as had been widely anticipated earlier in the year. There has been a significant revival in the level of active requirements, particularly large unit searches, which are converting into deals.

Examples of this are the lettings by Nomura (Watermark Place), Bank of Tokyo-Mitsubishi (Ropemaker), and Orrick Herrington & Sutcliffe (107 Cheapside).

The rapid correction in prime rents has succeeded in drawing occupiers back to the market, as they have moved to take advantage of the tenant-friendly environment.

In real terms, city rents are currently at their lowest level for more than 20 years, while West End rents are at a 13 year low.

Knight Frank has forecasted a combination of a global economic recovery and diminishing choice of new build options to stabilise prime rents at their current levels for the next twelve months, before rental growth returns in Q4 2010. This, Knight Frank has predicted, will mark the beginning of a new cycle for prime rents.

“Rents corrected very sharply in 2008 and early 2009 in anticipation of tenants sub-letting large volumes of space,” said James Lewis, director of investments and leasing, Knight Frank Middle East.

“While availability has increased this year, it has not been to the extent priced into the rents and consequently rent levels have found the floor,” he added.

“With global capital markets and world trade, the key drivers behind Central London’s economy, now rallying I see demand increasing gradually going forward, with a knock-on effect for rents from late 2010 onwards.”

Will Beardmore-Gray, head of City leasing, Knight Frank said: “The city has seen a marked increase in activity since its low point in quarter one. Even if you set aside the 540,000 sq ft Nomura deal, Q3 take-up looks set to top that of Q2, which was up by a third on Q1.”

“There is a definite upwards trend in activity emerging - it is certainly not a fresh boom, but it is a steady return to normality,” he said.

“The current wave of demand is partly driven by Asia-Pacific financial firms, like Bank of China, Daiwa Securities, Bank of Tokyo Mitsubishi, Macquarie Group and Nomura. I see the City as benefiting from its status as a hub in the system of global trade.”

Tim Robinson, head of West End leasing, Knight Frank said: “Earlier this year there was a great deal of concern that there would be a post-Lehman implosion of the hedge fund world, leaving the West End core over-supplied.

“While availability has risen significantly, the increase has been of a manageable level, and not greatly different in size to that seen in the 2001-2003 downturn. A major issue now will be the lack of development starts for delivery in 2011/12, particularly in Mayfair and St James’s, which I see pus