Slow improvement beckons

While the worst is over for the Midlands commercial property market, the recovery is expected to be slow although also steady. The problem lies in the future as the top grade offices get absorbed at a time when developers are still shying off building again. At the moment the market in Birmingham is dominated by deals at the smaller end of up to 465 sq.metres (5,000 sq.ft.). Nevertheless, a surge of lettings including a large one of 107,000 sq.ft. at Calthorpe House in the third quarter pushed the 2010 annual figure above expectations at 62,094 sq.metres (668,392 sq.ft.)) reports Jonathan Carmalt of King Sturge. “These figures show the breadth of occupiers in Birmingham with the outcome fitting into the long term average. With no new space being delivered this year the supply of Grade A will steadily diminish. In our view the current year will be challenging, particularly as the public sector is largely out of the market.”

In the broader context what is encouraging is that manufacturing is leading the UK economy out of the recession which is certain to impact on the Midlands industrial market, already noticeable with the decision to rescind the closure of a Jaguar car plant. The improvement in manufacturing is coming through the traditional industries of engineering and machinery which has always been at the heart of the Midlands economy. There is, however, some danger in the rebalancing from a consumer/public sector economy to more reliance on manufacturing. For example public sector employment is declining which Oxford Economics expects to limit employment in Birmingham this year, despite increased industrial output.

Another danger is increased inflation which has been persistently above target for some time. As the supply of properties declines, that could mean increased rents. At the moment the top rent reached for Grade A in Birmingham is £301.28 a sq.metre (£28 a sq.ft.) which Jonathan Fear of Jones Lang LaSalle said is the limit for this year. DTZ notes that prime space is thinly traded and there are only 3 or 4 buildings in the city with space available to meet this definition. It also puts rent free periods at as much as 24 months.