Zoning out?

This summer the UK office market is in a funny place, David Thame tells us.
Not a serious place, not a worrying one, but one in the twilight zone, somewhere between blip and recalibration.

The problem isn’t the flow of deals or the pipeline of speculative developments – there’s enough of one, and some of the other. No, what’s causing the unsettled feeling is the sense that the market is shape-shifting as the workplace revolution, coworking, Brexit and a surge of (often) overseas-funded speculative office investment tug in different and conflicting directions.

Take Birmingham, for example. Last year was brilliant for central Birmingham offices with just over 1 million sq ft of take-up, making 2017 the first in which the total has reached into seven figures. Yet early data from 2018 shows both a modest slow-down and a gentle speeding up – and if that sounds nonsensical, then you begin to see the problem.
Savills’ latest Market Watch: Birmingham offices forecasts that full-year take-up in central Birmingham will total circa 825,000 sq ft – 17% down on 2017. However, the first quarter of 2018 was after a first quarter that was 14% above the 10-year average, scoring deals totalling 148,000 sq ft. The highlight was engineering group WSP’s decision to sign-up for 46,100 sq ft at Brockton Capital’s The Mailbox, one of the first big signs of a HS2 dividend for the Birmingham office market.
Behind this confusing picture lies the fluid and expanding serviced office and coworking sector. Serviced office providers took around 219,000 sq ft in central Birmingham since January 2017, equating to between 18-20% of the market, depending who calculates it and how they do it. The wide-spread suspicion – voiced in Birmingham, but also in Manchester where serviced and coworking space is growing every bit as fast – is that many of the smaller office deals of the past are now vanishing into serviced floorspace.
What to make of this confusing picture? Cushman & Wakefield Partner, Scott Rutherford, is a specialist in office deals and developments, and head of the firm’s Birmingham office. His diagnosis is that a revolution is in progress but it’s nothing to be alarmed about.
‘2018 may not be a record year, but it will be a decent year,’ he says. ‘The slight fall in take-up is because we’re seeing businesses consolidate their office space but the result is a smaller footprint than they had before. We’ve had several clients end up taking 60% less space than they had before they consolidated or relocated their office – and of course that’s all thanks to agile working. They are often employing more people, just using less floorspace.’
Cushman & Wakefield’s London Head of Research, Elaine Rossall, says that this is a long-stranding national trend now suddenly making a big impact on the pipeline of transactions.
‘You used to calculate an occupier needed 200 sq ft per employee, then it shrank to 80-100 sq ft – and now we’re down as low as 60 sq ft per employee,’ she says.
This trend to smaller, more intensively occupied suites is exaggerated by a certain amount of economic uncertainty – so occupiers prefer not to gamble on big lease commitments – and by the fact that many of the big space users, like accountants and lawyers, have already made the move to more modern flexible workspace.
‘The upshot is we’re not seeing many larger deals over 50,000 sq ft,’ says Scott. ‘It’s really a sign of a healthy market. It’s the middle of the market that needs to be busy, and it is.’
In case you think Birmingham’s story is exceptional, head to the very different world of the Thames Valley.
Rob Pearson is an Associate Director in Savills’ South East office agency team and his diagnosis is remarkably similar to Scott’s. ‘We’re seeing the usual churn in the occupational market, but below the long-term average in terms of floorspace let. The South East market – predominantly Thames Valley – saw take-up of 3.1 million sq ft in 2017, below the 3.5 million sq ft average,’ he says.
The absence of big deals is striking – just two over 50,000 sq ft, way down on the 8-10 deals over 50,000 sq ft recorded in recent years. ‘It could just be an anomaly,” Rob speculates. ‘On the other hand, there is no disguising that the fact that occupiers are taking less space. Though I regard a greater number of smaller deals are being a healthy sign of a sustainable market.’
Coworking and serviced office space is making its mark, too. ‘Coworking represents a structural change in our market. It accounts for about 20% of the London office scene, probably 10% in the Thames Valley, and office occupiers love the flexibility,” Rob says. ‘They avoid the high up-front capital expenditure of traditional leasing, but beyond that they also get sold the dream – the whole thing about coworking spaces, coffee machines, beer on tap.’
The exceptions to the rule are London (in a big way) and Manchester (in a smaller way).
London’s office markets in the first quarter are up on the equivalent period in 2017, and the long-term trend, with Q1 take-up of 2.4 million sq ft. According to data from JLL, it was the West End that performed strongest, with the largest quarterly take-up for three years. The City did well enough – 1.3 million sq ft is about on trend – but East London, tipped as the new hotspot, bombed. A single three-month period is hardly long enough to make serious judgements about trends, but it is interesting all the same.
Meanwhile, in Manchester, the city is subject to the same pressures from coworking and agile working as everywhere else – coworking is expanding rapidly with both WeWork and upstart rivals like Work.Life joining a market that now accounts for approaching 20% of the market. But Manchester seems unphased by the change.
The latest figures from the local Office Agents Forum show Manchester heading for another year of take-up over 1 million sq ft, with a strong first quarter with deals double the volume of the same period in 2017 (442,000 sq ft). A monster letting to HM Revenue & Customs – who took a pre-let on 157,000 sq ft at English Cities Funds’ 3 New Bailey – largely, but not completely, explains the exemplary performance.
Proof that the HMRC deal was the rule, not the exception, comes from the suburban office parks of South Manchester, where take-up rose by 72% in the first quarter as tenants once again discovered the virtues of good-value floorspace. The stand-out deal was provided by online retailer The Hut Group, who signed up for 40,000 sq ft at Manchester Airport.
Paul Mills, Transactions and Asset Management Surveyor at OBI Property, explains: ‘The Q1 figures for out-of-town office markets are encouraging. There is a good quantity of larger requirements circulating in the marketplace and we therefore expect take up to continue to be very strong during the remainder of 2018.’
The UK office market is in an odd place. But it isn’t a bad place – not really.