Let’s get this clear, right here at the top of the page: there isn’t much office construction going on. Anywhere. Period.
On the face of it, this claim sounds untrue or exaggerated. Stand in London or indeed most UK regional centres and it looks busy – there are tower cranes on the horizon, rents are rising and big name occupiers are nursing substantial requirements. But most of the cranes are building apartments, rents are rising precisely because hardly any offices are being built and the big name occupiers are cooking up home-made workplace solutions (whether pre-lets, or localised re-thinks of their existing floorspace).
So here’s the stark truth. In Bristol and Cardiff, the office development pipeline runs dry this year. In Birmingham it dribbles to a halt in 2019. Even in cities like London and Manchester, where there is the potential flow of development into the next three years, the supply stutters and splutters and is far from even. Glasgow’s extensive pipeline ends with just 97,000 sq ft in 2021.
And if you look for a supply of new UK office development beyond 2021, you will be disappointed: there isn’t any. Not a single development.
Why? The simple answer is that to understand the three words ‘office development pipeline’ you also need to grasp the significance of four more: ‘late cycle’ and ‘alternative uses’.
‘Developers begun a series of speculative schemes which are now on site, and since then they have been sitting on their hands wondering what to do next,’ GVA National Director for offices Charles Toogood explains. ‘This is partly thanks to the uncertainties of Brexit. And partly because the market feels very late in the economic cycle. The funds that provide the money are feeling cautious about speculative office development – funding activity so far this year has been very restrained – and everyone is keeping their eye on interest rates, which will have the effect of softening yields, which will shrink funders’ interest in speculative office development even further.’
Those occupiers who can afford it – and whose long-term planning allows for long-term decisions – are signing up for pre-lets. Of the 4.7 million sq ft due between now and 2021 in the UK’s nine major regional office markets, 2.5m sq ft is already pre-let. ‘Not a fat lot of good,’ declares Charles.
This market is like surfing:
lots of standing around waiting for the next big wave
The result of uncertainty (and occasional burst of pre-let activity) is likely to be a very lumpy speculative development scene – a building here, a project there, as confidence successively fills developers’ sails, only to sag a short while later.
Manchester, where 854,000 sq ft is being developed up to 2020 (but thereafter, zilch) makes a fine case in point.
‘There’s new floorspace due every year to 2020, and then…nothing. Developers will decide what to do on the basis of how well the floorspace in the pipeline lets,’ says Andrew Gardiner, Director at Lambert Smith Hampton’s Manchester office. ‘Supposing developers and funders decided everything looked good in 2019 or 2020, we’ll still be waiting for a few years for buildings to come out of the ground, so that’s a few years of nothing.
This market is like surfing: lots of standing around waiting for the next big wave.’
In the meantime, little wavelets of occupier demand will eat away at the big waves of supply, says Andrew. The (more or less standard) assumption in regional cities is that 20% of floorspace will let before work begins, another 20-30% during construction and another 20% at or around completion of work on site. That leaves just a third of speculative floorspace as genuinely speculative.
Andrew – like Charles – is by no means confident that a steady pipeline of supply will resume after 2021. Not only does he share concerns about the wider economy, but the last decade of residential development has severely reduced the supply of potential office developments in Manchester and many other regional cities.
Referring to a development on Manchester’s northern fringe, Andrew says: ‘What started out as three 150,000 sq ft office blocks has now turned into one 150,000 sq ft office block and two lots of apartments – and that is the threat the office market is facing.’
Inevitably, much demand for new office space will divert into refurbishments – although they suffer from residential competition too. Quite simply, the office blocks that might have been refurbished have already been converted into apartments.
From his Birmingham office, Charles surveys the prospects of refurbished office space stepping in to fill the gap left by the dribbling pipeline of speculative floorspace – and it doesn’t fill him with hope.
‘Hotels, student housing, apartments – all provide higher capital values than offices, so landlords go for those uses instead. There’s now a shortage of refurbished space in the pipeline. There’s just three in prospect in Birmingham – that’s 300,000 sq ft between them – and I’m struggling to think of any other realistic possibilities in the next five years.’
So how to explain the speculative office supply pipeline? Is it a draught, did someone forget to turn on the tap, or is someone standing on the hose? Maybe it’s a little of all three. But for now, anyone expecting to get soaked had better forget it.
London is – always – the exception to the UK office market picture.
It peaks sooner, it peaks higher, and it collapses spectacularly.
According to Knight Frank, 6.9 million sq ft of office floorspace is under construction in central London, a full 20% ahead of the yearly average. At this stage in the economic cycle that ought to be worrying – it looks like too much, too late. But only 4.9 million is due for completion in 2018 and 2019, representing about half of the take-up for new and refurbished floorspace. Which is high, but not very high. Knight Frank concludes that the supply pipeline is ‘weak’.
Deloitte Real Estate complicates the picture, suggesting developers are getting ready for another burst of development – even if they haven’t started work on it yet. Deloitte say demolition has cleared the way for around 8 million sq ft of new, as yet merely planned, development.