09. März 2010 
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The north-south divide in office markets
Drivers Jonas Research has released its 2010 Office Trends research – a view of what’s in store for the office markets of London, Birmingham, Manchester, Leeds, Edinburgh and Glasgow.
Anthony Duggan, head of DJ Research, expects London to lead the occupational market recovery with double digit rental growth forecast in the City of London, and while the UK investment market will continue to see yield levels harden, he warns it may not be an entirely smooth ride to occupational market recovery for any of the other cities.
The report highlights that rental growth is unlikely to be seen in the regional key city centres in 2010. Occupier demand is expected to stay weak and the high levels of Grade A availability will take some time to reduce.
In the Midlands, demand in Birmingham is predicted to remain weak and largely driven by Government bodies and occupiers with imminent lease expiries. Current Grade A vacancy levels are in excess of one million sq ft with rental levels forecasted to fall by 3% in the first half of 2010. Prime yields will continue to harden and should reach 5.5% by year end.
In the north of England Leeds has no office developments in the pipeline but still has nearly all of 2009’s new stock available. With take-up down and little demand, rental deals and incentives are there for the taking with prime rents around £25 per sq ft. Investors are seemingly cautious over voids and letting risks given the weak occupational market with prime yields currently the highest of all the city centres at 6.75%. A similar story in Manchester with 250,000 sq ft of office stock delivered to market in 2010 adding to the existing oversupply with tenant demand expected to remain weak. DJ expects rents to continue to decline. Yields are expected to fall to 6%.
The Scotland market is a mixed bag with the Glasgow development pipeline now peaked with no new office schemes due to complete in 2010 and beyond and demand appearing more robust than in Edinburgh. This period of low completions should drive down availability once occupier demand improves. The lack of Grade A buildings offering large floorplates means that DJ expects to see pre-letting activity return to this market in 2010.
There is no office development Edinburgh at the moment and demand remains weak with further redundancies in the financial services sector expected meaning more “grey” occupier space may become available. Rents for both Scottish cities are expected to fall by a further 3% this year with Edinburgh prime yields reaching 6.25% and Glasgow yields falling to 5.50% reflecting the difference in the occupier markets.
So, there is mixed news for investors with falling yields but weak fundamentals in the occupier markets meaning falling rents, and market conditions remaining positive for those occupiers that can take advantage of the wide choice available at lower rental levels. Occupiers seeking new space in the regions will have a real opportunity to strike advantageous deals in the coming months, as we have seen in London.
Duggan warns: “It may not be a smooth ride to recovery for the key cities occupier markets – it is difficult to see where expansionary demand for office space will come from in the weak economic conditions. In addition it is widely expected that public spending will be cut whoever wins the election and markets heavily reliant on public sector occupiers might therefore experience a further bump on the road to recovery.
“Despite this, as the UK economy slowly returns to positive growth, market sentiment improves, and more importantly, the levels of available supply reduces and is not being replaced by new development, developer and investor confidence will grow. The data shows that the regional office development pipeline has now been turned off and only Manchester and Birmingham will see the delivery of any new office space this year. Indeed, Birmingham is the only regional city with anything due for completion post 2010 with one (part pre-let) scheme being delivered in 2012. This period of unprecedented low completions across all the regional cities will allow supply levels to be corrected and rental levels to stabilise and increase in the more active markets, but only once demand picks up.”
“And whilst there remains the threat to investor returns of rising gilt and interest rates and the worry that the UK's credit rating may fall we believe that prime yields will continue to harden across the UK’s key office city centres due to strong investor demand for the limited amounts of good quality product.”
Anthony Duggan, head of DJ Research, expects London to lead the occupational market recovery with double digit rental growth forecast in the City of London, and while the UK investment market will continue to see yield levels harden, he warns it may not be an entirely smooth ride to occupational market recovery for any of the other cities.
The report highlights that rental growth is unlikely to be seen in the regional key city centres in 2010. Occupier demand is expected to stay weak and the high levels of Grade A availability will take some time to reduce.
In the Midlands, demand in Birmingham is predicted to remain weak and largely driven by Government bodies and occupiers with imminent lease expiries. Current Grade A vacancy levels are in excess of one million sq ft with rental levels forecasted to fall by 3% in the first half of 2010. Prime yields will continue to harden and should reach 5.5% by year end.
In the north of England Leeds has no office developments in the pipeline but still has nearly all of 2009’s new stock available. With take-up down and little demand, rental deals and incentives are there for the taking with prime rents around £25 per sq ft. Investors are seemingly cautious over voids and letting risks given the weak occupational market with prime yields currently the highest of all the city centres at 6.75%. A similar story in Manchester with 250,000 sq ft of office stock delivered to market in 2010 adding to the existing oversupply with tenant demand expected to remain weak. DJ expects rents to continue to decline. Yields are expected to fall to 6%.
The Scotland market is a mixed bag with the Glasgow development pipeline now peaked with no new office schemes due to complete in 2010 and beyond and demand appearing more robust than in Edinburgh. This period of low completions should drive down availability once occupier demand improves. The lack of Grade A buildings offering large floorplates means that DJ expects to see pre-letting activity return to this market in 2010.
There is no office development Edinburgh at the moment and demand remains weak with further redundancies in the financial services sector expected meaning more “grey” occupier space may become available. Rents for both Scottish cities are expected to fall by a further 3% this year with Edinburgh prime yields reaching 6.25% and Glasgow yields falling to 5.50% reflecting the difference in the occupier markets.
So, there is mixed news for investors with falling yields but weak fundamentals in the occupier markets meaning falling rents, and market conditions remaining positive for those occupiers that can take advantage of the wide choice available at lower rental levels. Occupiers seeking new space in the regions will have a real opportunity to strike advantageous deals in the coming months, as we have seen in London.
Duggan warns: “It may not be a smooth ride to recovery for the key cities occupier markets – it is difficult to see where expansionary demand for office space will come from in the weak economic conditions. In addition it is widely expected that public spending will be cut whoever wins the election and markets heavily reliant on public sector occupiers might therefore experience a further bump on the road to recovery.
“Despite this, as the UK economy slowly returns to positive growth, market sentiment improves, and more importantly, the levels of available supply reduces and is not being replaced by new development, developer and investor confidence will grow. The data shows that the regional office development pipeline has now been turned off and only Manchester and Birmingham will see the delivery of any new office space this year. Indeed, Birmingham is the only regional city with anything due for completion post 2010 with one (part pre-let) scheme being delivered in 2012. This period of unprecedented low completions across all the regional cities will allow supply levels to be corrected and rental levels to stabilise and increase in the more active markets, but only once demand picks up.”
“And whilst there remains the threat to investor returns of rising gilt and interest rates and the worry that the UK's credit rating may fall we believe that prime yields will continue to harden across the UK’s key office city centres due to strong investor demand for the limited amounts of good quality product.”
