The UK’s regional office markets are in a strange place. Amidst Brexit frustration and a cautious money market, the supply will not pick up soon, as David Thame reports.
Simon Price is frustrated. As he looks out of his window of the Bristol office of surveyors Alder King he sees a city whose office occupiers are scrambling for office space and prepared to pay ever-higher rents to get hold of it.
Yet what Simon doesn’t see from his office window are the tower cranes and scaffolding that show developers are busy meeting that need. On the contrary, things are remarkably quiet.
Next year, Bristol’s office market will see hardly any landlord-led office refurbishment. ‘If the total adds up to 100,000 sq ft, that would be surprising,’ says a disconsolate Simon.
Outside the economic juggernauts of London and Manchester (and, to some extent, Birmingham), the Bristol experience is typical of UK office markets. On the one hand, office occupiers are mostly still tails-in-the-air busy. On the other, office landlords and developers see no particular reason to take risks today, six months out from Brexit and five years into a gently-inflating property bubble. In part, this is a shrewd calculation – after all, sitting on their hands keeps office supply low, which in turn helps keeps rents up – but it is also because they genuinely don’t feel very optimistic.
Talk privately, as Mix has done, to some of the truly big names who fund office development in the UK regions and you quickly see why. ‘Late cycle,’ one mutters. ‘It reminds me of 2007, and we all know what came next,’ says another. To put it bluntly, they are slightly scared and certainly very cautious. Nobody will be getting much money out of them any day soon.
In Bristol this translates into some big potential office new build and refurbishment plans that are stuck awaiting board-level approval – around 250,000 sq ft of new floorspace that isn’t going to happen as soon as it might due to hold-ups further down the funding stream.
‘It’s just frustratingly slow on new building and refurbishment,’ says Simon, ‘and the frustration is because the office market remains very strong, with take-up consistently good for the last three to four years.’
The strength of demand is proved by the rapid rate of rental increases, Simon insists. ‘Cubex Land’s 95,000 sq ft Aurora office development was all but fully let before construction completed, and every deal set a new record rent. Before that scheme started on site, the top rent was £29.50 per sq ft – today it is £35, which shows the strength of the market.’
Royal London – who has just bought the freehold of the Cubex block – is behind the next 90,000 sq ft of new floorspace in Bristol, due for completion in 2020. But otherwise, there’s not a lot coming: the pipeline is dry.
Simon’s guess is that the out-of-town business parks of North Bristol will be the beneficiaries, as office occupiers look for floorspace. ‘For the first time in a long time – perhaps ever – we’re seeing some city centre occupiers looking at out-of-town options because they simply have no choice – and of course it is much cheaper out of town. Top rents are £22.50 per sq ft and rising a little, but that’s still a huge discount on the city centre.’
No surprise that landlords and developers are grabbing opportunities in north Bristol, the prime example being Columbia Threadneelde’s 12,000 sq ft Building 600, Aztect West.
But a handful of new builds and refurbs is all Bristol has – and according to Simon it’s not likely to change. ‘Rising construction costs in the South West – the Hinkley power station project is not helping because it is adding to the demand for construction services – are a big worry for developers. But they are also looking at the economy and nobody is going to put their name to anything big six months out from Brexit. They are taking a step back and being very cautious,’ he says.
Switch the focus 400 miles north to Glasgow and things look eerily similar, with one important – not very comforting – difference.
According to Alistair Reid, Director of office agency at JLL in Glasgow, it would be easy to believe the Scottish office market was on a roll. A series of major pre-lets – Clydesdale Bank took 111,000 sq ft, whilst HMRC took another 187,000 sq ft – suggest strength. And it is certainly true that speculative office development is being let well ahead of completion on site.
The first half of 2018 saw Glasgow perform well – the second quarter was 50% up on the same period last year – and the mood is good.
However, Alistair says the problem is that, behind these big headline deals, the market is flat. The sense of caution that, in Bristol, grips landlords and developers (but not occupiers) in Glasgow extends to everybody. Sitting on hands is the city’s default position.
‘I don’t think there is a great depth of enquiries behind the big deals. The headline take-up numbers for Glasgow look impressive but there isn’t a long list of people waiting behind them. It’s not a super-strong occupational market and, for the indigenous office occupiers, it’s challenging,’ Alistair says.
Alistair does not expect anyone to enjoy a sudden rush of confidence and, therefore, the development, refurbishment and occupational scenes will continue flat into 2019. The upside is that he predicts many occupiers – unwilling or unable to move into new offices – will instead upgrade their existing floorspace. There’s a real opportunity for new fit-outs, he says.
A general upscaling of Scottish office space is already in progress. Architects 10 Design opted for a contemporary look at 132 Princes Street, Edinburgh, as they increase their footprint from 2,000 sq ft to 5,000 sq ft. Meanwhile, surveyors JLL went for ultra-modern after signing a new 10-year lease at 7 Exchange Place, Edinburgh. There is a collaboration zone at the centre of the office, designed with an emphasis on video conferencing capabilities, including BlueJeans and an emphasis on other smart technology.