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According to Jones Lang LaSalle’s Quarter 2 UK National Voice research report
UK office take-up activity in Quarter 2 2010 (Q2 2010) continued to show improvement on 2009 levels but, with the exception of the Western Corridor region which saw a 65% increase in take-up and Glasgow, was lower than Q1 2010 as concerns over the problems in the Eurozone and the UK’s own austerity measures continued to impact occupier demand for office space according to Jones Lang LaSalle’s latest National Voice - Office Market Conditions across the UK research report (for locations outside of London).
Demand for office space in the six key regional markets outside of London* monitored by Jones Lang LaSalle, continued to be driven by market churn and consequently there were few requirements for space above 25,000 sq ft. With demand expected to be generated primarily by lease events in the short term an increase in occupier activity is not anticipated before 2011.
James Finnis, head of Jones Lang LaSalle’s National Office Agency team, England, commented: “With structural demand remaining the key driver of take-up, we anticipate that deal sizes will stay small this year with net absorption negligible. Any larger transactions will be generated from big corporates who can exploit lease events to consolidate their regional offices, but with cost control remaining high on their agenda limited expansionary demand is anticipated.”
Since the economic crisis in 2007, all markets, with the exception of Glasgow, had seen a growing reliance on the Public Sector. Consequently, the spending cuts announced in June’s Emergency Budget represent a significant downside risk as the Public Sector may no longer be able to finance relocations and the ensuing job losses will result in surplus office space coming onto the market. There has already been a noticeable impact on demand; over the second quarter of 2010, Government departments accounted for just 13% of activity across the six UK markets, compared with 25% during 2009.
Mike Buchan, Director, Jones Lang LaSalle Glasgow Agency team, added: “On a more positive note, as cost reduction will be a priority, this may offer opportunities for good quality product at a lower price. Furthermore, Public Sector occupiers will be looking to work their space harder and we expect workplace strategies will become increasingly important and there may still be movement within the Public Sector if the total cost savings achievable can be proven.”
Overall supply conditions in Quarter 2 were still tenant favourable throughout the UK but, according to Jones Lang LaSalle, this masks significant differences between the choice of Grade A and Grade B space. Grade A supply is already tightening, accounting for just 41% of current supply and the continued absorption of this space will drive a return to more landlord favourable terms being agreed by 2012. There was 500,000 sq ft under construction at quarter end, of which 48% was due to complete this year. Most of this space is within schemes in Birmingham and the Thames Valley – there was no space under construction in Edinburgh and Glasgow.
Frances Ketteringham, Senior Analyst in Jones Lang LaSalle’s EMEA Research team, concluded: “With no imminent speculative starts across all markets, there will be very few Grade A options on the market from 2011 and there is strong possibility that for larger requirements we will see preletting activity due the paucity of good quality, large options available. In contrast, absorption of Grade B supply will be slower and exacerbated by the loss of Public Sector jobs.”
The selective shortages of emerging Grade A supply is putting upward pressure on rents and reducing incentives, although there was still a lot of flexibility within deals. Incentives have been supporting headline rents across the regional markets for the last two years and there needs to be some hardening of incentives before a return to rental growth. Stabilisation, albeit at a low level, was also seen in rental values for good quality space in secondary locations. The differential between the prime rents and these varies significantly between markets but is typically between a 20% - 30% discount to prime.
Prime office yields in markets outside the South East have stabilised at 6.00%, 25 bps higher than Q1 2010, as the depth of buyers started to thin and was reflective of a growing concern that the weight of money in the market, which was previously driving an increase in pricing, was not adequately capturing all occupational risk. Investor demand remained focused on prime product but a lack of availability resulted in increased interest in good quality secondary assets with active asset management opportunities.
Notes to Editors:
*Jones Lang LaSalle’s latest National Voice - Office Market Conditions across the UK report (for locations outside of London) examines Quarter 2 2010 activity and provides a forward looking view on the office leasing markets in Birmingham, Leeds, Manchester, the Western Corridor, Edinburgh and Glasgow.
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