City poised for solid growth
Office market remains in buoyant shape
Edinburgh’s office market continues to be buoyant with demand outstripping the supply of top quality space.
A number of key deals set to complete in the first quarter, according to property consultancy JLL which said the final end of year take-up for Edinburgh was just above the 10 year average.
Its findings follow a report from Knight Frank that office space take-up of 760,000 sq ft was down on 2015’s figure of close to one million sq. ft., which was the best for 15 years. However, last year’s figure is still well above the ten-year average of 630,000 sq. ft..
JLL reports that 779,000 sq ft, spanning 184 occupier deals, was transacted in Edinburgh during the full year, down 17% from 2015’s total of 940,000 sq ft.
Notable occupier deals during the fourth quarter included Edinburgh university’s purchase of the former fire station at 76 Lauriston Place totalling 34,130 sq ft, Ernst & Young letting 32,500 sq ft at Atria One and ST Microelectronics letting 21,530 sq ft at Tanfield.
Supply increased marginally from 4.4% in Q3 to 4.8% in the final quarter because of new tenant space being released at Atria One, 22 Haymarket Yards and in South Gyle.
However, take-up is only part of the story, as Craig Watson, Director, Office Agency, JLL notes in his analysis of 2016 and predictions that will shape letting activity for 2017.
“Office enquiries rose in the second half of 2016 following the Brexit vote, but the number of viewings fell during the same period, as businesses increasingly adopted a ‘wait and see approach’,” he said.
“While we have continued to secure new mandates since the vote, we have definitely noticed that decisions are taking longer. Increased due diligence has been a noticeable trend for some years, but it has intensified in recent months, leading to longer deal completion times.
“Businesses are finding it increasingly difficult to plan ahead for new recruitment and with doubts mounting around the future processes regarding the employment of EU nationals, lease flexibility will be high on the agenda for many occupier deals this year.”
Supply constrained as new Grade A in short supply
“Looking ahead to 2017, despite continuing political and economic volatility, one thing remains certain. Supply of office space in the capital will remain extremely tight. Demand for Grade A space will continue to increase, placing additional pressure on the market, to a large extent sheltering Edinburgh from hesitancy created by Brexit.
“In terms of new supply, Grade A developments coming to market are few and far between, with only one due for completion this year at Quartermile3. Next year will see the completion of Semple Street in May and the Mint Building in summer which should act to alleviate some pressure. A key trend which we’re already seeing is a demand for refurbished property, with One Lochrin Square coming to market in Spring 2017 and Greenside later this year.”
Edinburgh’s TMT sector set for take-up growth
“TMT is to be only sector showing sustained growth as professional services and Finance will tread very cautiously over next 18-24 months, with many looking to delay making decisions where they can.
“With this in mind, it’s likely we’ll see more lease renewals and re-gears as a result amongst occupiers who may want to delay making relocation decisions, unless they have no other choice or their building becomes obsolete.”
Knight Frank said Technology, Media, and Telecommunications (TMT) companies have held the top spot for the last three quarters in terms of activity.
However, professional services firms acquired 47,000 sq. ft. of accommodation to become the main occupier for the final three months of the year.
Simon Capaldi, associate at Knight Frank, said: “The last 12 months have been solid for Edinburgh offices. Occupational transactions have remained remarkably robust, even compared with 2015’s stellar year.
“In fact, it could have been even better. Many businesses have adopted a ‘wait and see’ approach in response to the uncertainty seen in 2016, while a number of deals have carried over and should conclude in Q1 or Q2 of this year – it should be a strong start to 2017.”
By the end of 2016 there was under 200,000 sq. ft. of Grade A stock available in Edinburgh city centre, compared with in excess of 550,000 sq. ft. of named live requirements. With no new-build Grade A stock likely to come onto the market until early 2018, Knight Frank said supply and demand dynamics were likely to put pressure on rents.
Kr Capaldi added: “There’s a perfect storm brewing, as supply levels near ten-year lows and demand continues to grow. A significant number of lease events are approaching, which could create a spike in new requirements in the next 18 months.
“The result will be rents moving upwards for some property types, particularly at well-located, Grade A offices with larger floorplates; while incentives are likely to come down at smaller units.
“It’s set to be a challenging period for occupiers: some could find they are squeezed out of the city centre by rising costs and will therefore need to look to the west of Edinburgh and other locations on the city’s periphery.
“However, some good quality refurbished office schemes, such as One Lochrin Square, are coming to the market in the window between now and the next set of new builds completing, which will provide much-needed accommodation.”
According to Savills research, Glasgow witnessed strong levels of office take-up in 2016, surpassing the 10-year annual average of 500,000 sq ft within the first three quarters (totalling 523,000 sq ft, a 26% uplift on the same first three quarters of 2015) and a total of 800,000 sq ft of deals completed by the year end.
Keys deals include a 154,814 sq ft pre-let to Morgan Stanley at Bothwell Plaza, ACCA taking the remaining 55,744 sq ft of accommodation at 110 Queen Street, AXA moving to 49,424 sq ft in Cuprum and Edrington Group agreeing a new lease on 29,890 sq ft at 100 Queen Street.
These strong take-up levels leave Glasgow’s Grade A office stock at a shrinking circa 400,000 sq ft, says Savills, of which only 130,899 sq ft is classed as ‘new’.
With ongoing occupier demand from the likes of Mott Macdonald, Scottish Courts, Mazars, Wood Group and HMRC, who are actively looking for almost 400,000 sq ft in the city between them, Savills notes that these significant requirements alone could suggest a substantial supply / demand imbalance.
However, the firm highlights that Glasgow’s speculative office development pipeline remains closed with new developments now not likely until 2020 due to uncertain economic and political conditions and a possible influx of buildings suitable for refurbishment coming back on to the market in the next three years.