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A February fog of confusing data obscures a UK office market that is surviving, and sometimes thriving, as David Thame reports.
They say that driving in dusky light is the most perilous. Shapes lose their focus, proportions get distorted, distances are hard to gauge and the eyes play tricks on the mind.
The UK property markets have been driving in the dusk for the last 12 months, and conditions have never been more difficult to read.
The second half of 2019 was grim. The UK’s property markets all but ground to a halt, waiting for the Brexit crisis to play out. If it hadn’t been for a series of long-mulled relocations by BT, the occupational market in the regions would have been all but silent.
Understanding what’s going on isn’t helped by the glass-half-full approach to data analysis, and by a focus on the extremely atypical London markets. So Savills report City of London take-up for December 2019 at 579,329 sq ft across 43 deals, giving a total for the year of 6.7m sq ft. They point out this is down on 2018 by 13% but up on the 10-year annual average by 5%. What to make of this? Was it good news or bad news?
But do not fear. We will hold your hand through the statistical twilight and provide some daylight-clear talking points. The overall conclusion is that most markets are in that most English of conditions: they are doing alright.
Insurance used to be the preserve of the City. But no longer. The insurance sector has been returning to the West End after a decade or more searching for office floorspace in cheaper or more traditional locations. Savills data shows that 910,000 sq ft (roughly 22% of the West End’s total take-up) was let to the sector in 2019. It is the latest in a steady rise since 2016 and a longer-term trend that has seen the sector turn to the West End in increasing numbers since the 2009-2012 recessionary trough.
Insurance shares the crown with the tech and media sectors, whose appetite for West End floorspace shows no sign of easing. Today they account for one in every four sq ft leased in the West End market.
If you forget 10-year averages, and talk instead about the seven years since the economy began to flicker back into life in 2013, then 2019 was definitely a good year, if not a vintage one.
Those searching for a downside might focus on the 20-22 month rent free periods, still standard in most deals, which indicates a certain amount of market softness. Demand for new office space is steady at around 4 million sq ft of serious active requirements, and the volume of new development is digestible (and much of it already pre-let). This will give developers and investors confidence, and keep rents bobbing around £110-£120 per sq ft for the best floorspace.
Leeds is the often over-looked success story of the UK regional markets. Channel 4’s decision to locate its new 27,000 sq ft national HQ and digital hub to Rushbond’s Majestic, a former cinema, marked a turning point. The first half was storming (up 41% compared to 2018) and the second half was good. Total take-up hovers around 1 million sq ft.
McLaren Property’s 330,000 sq ft Wellington Street scheme will provide the next test of Grade A demand and fits into a growing trend for occupiers to move away from the traditional core and into fringe locations. Meanwhile, occupiers from out-of-town locations are moving back into central Leeds. The result is strong demand and rents at £34 per sq ft (and rising). Pre-lets are the order of the day, with Grade A supply strictly limited until 2022. The consequence is that Leeds is increasingly attractive to developers: expect some new starts, with developers Vastint and CEG expected to jump.
The Scottish capital had a thin year, with take-up down from 1 million sq ft in 2018 to 650,000 sq ft in 2019. The Brexit crisis, which all but wiped out take-up in Q4, is largely to blame in a market notoriously vulnerable to international financial shocks. Data from JLL suggests many occupiers simply sat on their hands during 2019, with appreciably more tenants rolling over existing leases rather than moving (around 275,000 sq ft fell into this category – almost half the market and 45% up on 2018). The number of viewings of new properties plunged by 35% as a result, said JLL.
If Edinburgh occupiers recover their mojo in 2020, it will be back to normal. If they don’t, it’s going to be grim.
Forthcoming attractions include 2020 completions by BAM at Capital Square (120,000 sq ft) and by Vastint at New Fountainbridge (60,000 sq ft). M&G/Qmile’s Haymarket scheme begins to deliver the first phase of a 370,000 sq ft development in 2021.
Whilst every other office market saw a downturn in 2019, Bristol saw the opposite. Data from the Bristol Office Agents Society, covering Q4 2019, shows the final quarter clocked up a total take up of 332,000 sq ft, roughly half the total for the entire year, which was 694,000 sq ft. The figure is well ahead of both the five and 10 year averages thanks to British Telecom, who took 200,700 sq ft at AXA/Bell Hammer’s Assembly, which is the largest deal on record for the city centre market.
Which is why Bristol needs to be treated with caution: as Shakespeare did not say, a single big deal in a small city does not a bull market make. Exclude BT and the market looks thinner but not anorexic, with deals to serviced operator Instant Group taking 33,000 sq ft at Temple Point, a sign of the footloose tech sector’s interest in the city. Out-of-town, in the business parks, Bristol had an iffy year, with take-up down to 245,000 sq ft.
City rents are high (£37.50 per sq ft for the best small suites), which piques developer interest. New schemes at The Distillery, 1 Portwall Square and Halo provide over 240,000 sq ft between them. Tristan Capital Partners and Candour Group have just acquired a site at Glass Wharf for a 220,000 sq ft development, which will start on site this summer for completion in 2022.
Professional and financial services continue to dominate, which means Birmingham does well when the economy goes up, but is vulnerable when it goes down.
A slight sense of anti-climax pervades the Birmingham market, which saw take-up surge up to an unusually high 1 million sq ft in 2017, a number not seen before nor, sadly, since. In 2019, take-up in the city centre totalled 780,000 sq ft, rather below the five-year average. Like Edinburgh, Birmingham is exposed to financial sector Brexit anxieties, and it is also possible that the relative lack of new Grade A floorspace inhibited the total. These thoughts bring comfort to the developers of the next generation of new build schemes at Three Snowhill, 2 Chamberlain Square, Paradise and 103 Colmore Row. Professional and financial services occupiers continue to dominate, which means Birmingham does well when the economy goes up, but is vulnerable when it goes down.
Still the big-boy of the UK regional markets, and still performing well. The days when 1 million sq ft of city centre take-up was a novelty are now long gone: the city centre scored 1.45 million sq ft in 2019, a shade down on 1.75 million sq ft in 2018 but still above the five-year average of 1.35m sq ft according to figures from the Manchester Office Agents Forum. The entire Manchester market (including the Quays, Old Trafford and the southern airport-proximate business parks) totals 2.34 million sq ft, the equivalent of Birmingham, Leeds and Bristol combined.
The growth of tech and coworking/serviced occupiers, often catering to the tech sector, set the pace in Manchester in 2019 and will again in 2020. Tech’s unstoppable rise was symbolised by the government’s secret eavesdropping organisation, GCHQ, who signed up for 60,000 sq ft. Coworking and serviced deals included Spaces acquisition of the 121,000 sq ft 125 Deansgate – the largest deal concluded in the city centre last year. Other operators to commit to workspace in the city include WeWork at Hyphen (51,000 sq ft), Huckletree (25,800 sq ft) at the Express Building in Ancoats and Regus (26,350 sq ft) at St James’s Tower.
Rents continue to rise, with a new a record of £36.50 per sq ft set during 2019. Agent speculation says it will be 18 months or less before it reaches £40 a sq ft, still only a third of London West End top prices and looking like very good value to relocators.
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