City running out of top grade space
Office shortage forcing up rents in strong Edinburgh market
Edinburgh companies are facing higher office costs and frustration at the lack of options for expansion because of the lack of top quality floorspace.
More building is required to prevent a sizeable jump in rents and to meet the business needs in the city, according to a report by DTZ which warns there is only six months supply of top grade property left.
A surge in pre-letting has driven annual take-up of office space around the UK to the highest level on record. With occupiers increasingly active in the first half of the year, the annual take-up volume outside London was 5.9 million sq ft – 35% above the long-run average.
Demand in Edinburgh has been particularly strong with take-up volumes above the five year average for the third consecutive quarter.
The overall volume in the second quarter was 148,000 sq ft with grade A deals representing over half. The low level of development and high volume of take-up “has reduced availability considerably”, along with the number of offices being converted into homes and hotels.
DTZ says there is just over six months’ supply of grade A space left in the city centre at prevailing take-up rates. New space will be provided at Haymarket (above) and New Waverley but not for some time yet.
Mark Jones, an office director of the firm in Edinburgh said: “Occupiers experienced a long period of oversupply, which DTZ predicted would then evaporate quickly about a year ago. With no new office buildings reaching completion, combined with increasing demand driven by lease expiries, the market is under-supplied, particularly for city centre grade A space.
He added: “After a rent stagnation lasting nearly a decade, landlords are now able to secure higher rents with smaller incentives. Occupiers are facing a period ahead of not only higher office costs but also frustration at the lack of options when implementing an estates strategy. Construction starts are needed to prevent a sizable jump in rents and to meet the business needs in Scotland’s capital city.”
Alex Dunn, senior UK analyst at DTZ, added: “The surge in pre-letting activity has been enabled by an enlarged development pipeline following years of developer inactivity. Eight million sq ft of speculative space is due to be completed by 2019 – an enormous 138% increase in development compared to the last four years. Nonetheless, it is still 15% below the average pre-Crisis rate of delivery, which suggests developers are still acting relatively cautiously.”
Take-up is absorbing standing stock as well as yet-to-be-completed schemes and, with seven consecutive quarters of above average lettings activity, availability has continued to fall across all grades. Grade A availability has become critical in some regions, notably Leeds which has less than five months of Grade A supply left at prevailing take-up rates.
Ben Clarke, head of UK research at DTZ, said: “The short-term supply squeeze means many incumbent occupiers needing space immediately are leasing additional space elsewhere, rather than vacating and taking one larger premises. This is because availability is fragmented and larger chunks of space are currently very limited. The balance of power has definitely shifted towards landlords.
“We are seeing this translated into rent increases and also in less favourable lease terms. These include reduced rent free incentives, which have fallen by 12% since the beginning of the year to an average of 18 months on a 10 year commitment.”
Prime rents are forecast to rise by an average of 11% by 2019 as new, higher-quality projects come to market and competition intensifies over suitable available space. Rents in Birmingham and Manchester are expected to increase the most, by 14% each to £32.50 per sq ft and £36.50 respectively.
Mr Clarke added: “We continue to see strong investor interest in the UK regions, with a total transaction volume of £930m so far this year. This has been underpinned by the improvement in underlying occupier markets and the yield differential with London. Prime regional office yields moved in a further 36 basis points to 5.3% in the first half of 2015.”