Yorkshire grit payout

Perhaps it is a reflection of the region’s determined spirit, but the commercial property market is apparently ignoring the dire economic warnings and having something of a revival.

That has opened the way for higher office rents and a return of new development in central Leeds. Jeff Pearey of Jones Lang LaSalle takes an optimistic view of the situation.

“We have seen a significant improvement in occupier activity in the second quarter (which has continued since) with a 331% increase in lettings compared with the first three months and shows
that stronger sentiment is finally returning to the market,” he said. According to the Leeds Agents’ Forum there are promising signs that take up this year could top 37,160 sq.metres, well ahead of 2010. The Forum said: “While occupiers remain cautious, the figures show a healthy level of interest, at what is traditionally the quietest three months of the year.”

Some of these requirements are of impressive size. The law firm Squire Sanders & Dempsey is seeking 5,574 sq.metres. This illustrates Leeds’ role as a legal and financial centre. The natural reaction in a city where the amount of Grade A space is declining is new development.

And so to the action. Planning permission was granted in October 2011 for the redevelopment of a 120,000 sq.ft. landmark building above Leeds City Station. City House will provide Grade A, BREEAM Excellent offices suites of all sizes, meeting/conference facilities and serviced offices. The main contractor is due to be selected and various approvals with Network Rail are progressing to enable a start on site early next year with completion scheduled for mid 2013.

Gregory Projects and Marshall have also submitted a planning application for a £30 million office and hotel scheme at Whitehall Plaza, next to the railway station. It will have a 130 bedroom hotel and 4,645 sq.m. of offices. Richard Dunn of letting agent Sanderson Weatherall commented: “There is a shortage of Grade A offices in prime city centre locations and even ahead of the planning application, occupier interest in the scheme has been encouraging.” Adam Cockcroft of joint agent DTZ added that “Leeds remains one of Europe’s top business destinations and still enjoys a healthy demand for high quality offices, despite the economic downturn.”

Backing Bristol

There are signs that Bristol is heading for an improved office market that will put it back in the spotlight as one of the top regional cities.

The growing shortage of Grade A space indicates that speculative schemes could be once again on the agenda and that rents will respond. At the moment, said Simon Price of Alder King, “the city centre is polarised around a considerable amount of empty second hand space that is unlikely to be let in the near future.”

The likelihood is that space will be refurbished for a variety of uses and in some cases demolished for new schemes. “We now have five or six active enquiries for sizeable amounts of space of between 2,323 and 6,503 sq.metres (25,000 and 70,000 sq.ft.) and believe the growth prospects are good for the next 12-18 months,” Price said. He has two clients examining plans for new development, a sensible policy given that supply of Grade A is only sufficient for just over a year. As far as rents are concerned, the top rate is £296 a sq.metre (£27.50 a sq.ft.) which will now apply to new schemes. The expectation must be for incentives to narrow.

Although take up declined by 47% to 8,0822 sq.metres (87,000 sq.ft.) in the second quarter, there was, said DTZ, “greater interest in highly specified Grade B which offers more options and flexibility for mid sized professional firms.” The consensus is that take up will be around the same level as 2010 although this could be beaten if Axa take the sizeable amount of space they have indicated they need in the future. Indeed the financial sector was more active with some firms seeking space that they can grow into. The investment market reflects the improving situation “with a tentative equilibrium at the prime end and a contrast with the secondary properties which will be re priced.”

All gone

At a time when many cities, including Birmingham, are seeing a decline in Grade A offices, the last speculatively built big shed in the UK has been let to Amazon.

This is Gazeley/Met Life’s 65,030 sq.metres (700,000 sq.ft.) shed at G-Park, Rugeley, Staffordshire which was taken by the on line retailer on a 15 year lease. Known as Flair, it has been available since 2008.

Such has been the pace of Amazon’s expansion that it has leased a number of large sheds in the UK at Doncaster and Peterborough as well as a massive warehouse in Dunfermline, Fife.

It comes at a time when, said Colliers International, average prime and secondary rents in the Midlands have been static for 12 months. Colliers’ Simon Norton said: “I have a distinct feeling of dejavu reading the statistics. They are no different from 2010.”

But he believes they are likely to increase now that the take up of prime space has eaten into supply. “The lack of speculative development due to the scarcity of funding and the general lack of confidence due to the recession have exacerbated the situation.

For the first time in years, landlords are beginning to feel that they may have the upper hand and are holding out for better rental terms.” At the heart of the decline was the fall in land prices. For example, in the West Midlands lot sizes of 10 acres or more averaged £484 an acre this year compared with £221 in 2006.

Where land is available for expansion, developers are increasing the size of existing estates, such as Hortons at Hollymoor Point, Rubery where it will build a new unit for NVC (Manufacturing) China’s largest lighting manufacturer, who already occupy a unit there, making a total occupied of 8,454 sq.metres (91,000 sq.ft.) at Rubery.

Typical of many estates, Target Park, Redditch only has two units available after the sale of a 1,134 sq.metres (12,209 sq.ft.) warehouse to Heartbeat Manufacturing.

Highcross Invests

One development that has started is the second phase of Highcross’ 3,406 sq.metres (36,665 sq.ft.) refurbishment of Livery Place. It is the largest refurbishment, costing £1 million, in Birmingham in 2011 and will bring the property up to Grade A status. This follows the first phase which cost £3 million on the 5th and 7th floors and common parts.

Highcross is having real success with the property. The company’s Joe Curlett said: “Randstad, the human resources firm, has taken a floor of 836 sq.metres (9,000 sq.ft.), soon after Packt Publishing has taken further space. We will be offering a boutique suite soon.” CB Richard Ellis’ Theo Holmes said: “Tenants are turning their attention to good quality refurbished Grade A space, which generally can be acquired for up to £10 a sq.ft. cheaper than new space in the city centre.” CB Richard Ellis has been chosen as the sole letting agent by Ballymore and Hines for the 29,170 sq.metres (314,000 sq.ft.) in the second phase of Two Snowhill.

The law firm Wragge & Co, will occupy virtually half of the scheme. CBRE is now also marketing 4,180 sq.metres (45,000 sq.ft.) in the Mailbox, recently bought by Brockton Capital. Brockton’s David Zimmerman said: “We have a significant capital budget allocated to maximise the potential of the Mailbox as a key destination in Birmingham. We are continuing our strategic review of the asset, the results of which will be the basis fordeveloping our overall vision for its future.”

Looking ahead

On the assumption that the current development phase is coming to an end, the market may shift to a bout of pre letting as companies realise they have to find space for future growth. Certainly, CB Richard Ellis expects an increase in pre letting as the only option for large occupiers as availability has fallen by 706,040 sq.metres (7.6 million sq.ft.) since 2009. That situation is reinforced by there being only 603,850 sq.metres (6.5 million sq.ft.) under construction in central London, of which nine cater for large occupiers.

That makes the timing of Sellar Property’s The Place, a 17 storey scheme of 55,740 sq.metres (600,000 sq.ft.) at London Bridge Quarter to add to the Shard, a good piece of timing. This part of London is being transformed with a new public piazza, railway station concourse, underground, shopping mall and bus station. Irvine Sellar, the developer, said: “The Place will be London’s largest and most efficient office building to hit the market in 2013, at a time when there is expected to be a real shortage of Grade A space available.”

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Weathering the storm

There is a depth to the West End office market that helps it to weather the market gyrations between the highs and lows of sentiment. For example, in the second quarter when the shortage of Grade A space grew, bringing a 30% decline in take up, second hand space took up the slack and grew strongly so that the total for the quarter was an average 102,190 sq.metres (1.1 million sq.ft.). Knight Frank reports that the vacancy rate is the lowest for three years at 5.6%.

That has pushed speculative development up by 10% in the second quarter. Richard Scott of Mellersh & Harding commented: “The market has been quiet in August but there is a lot of money chasing safe havens. The hedge funds and commodity traders are still seeking space.

Apart from the shortage of Grade A for letting, there is also the lack of top space for investment.” Among the Mellersh & Harding deals, there is the sale of a mixed use property at 73-77 Kings Road, SW3 to a private client of Concorde Capital for £13.5 million, a yield of 5.25%. While there is always a shortage of large development sites in the West End one that bucks this is the former Middlesex Hospital in Fitzrovia.

The consortium of Exemplar Properties, Aviva Investors and Kauphing has a new design for it with a mixed use scheme of 53,418 sq.metres (575,000 sq.ft.) that uses a mix of facades to merge with the surrounding area, rather than a modernist approach as proposed by MAKE. Part of the office content is designed to appeal to the media as befits the area while the residential space has been changed to 250 small private flats from 181 larger ones.

Summer break

After a buoyant recovery comes the adjustment as the UK economy slows and the office market comes up against the shortage of Grade A space. The question at the moment is whether the slowing of the momentum will last for a lengthy period or whether it merely reflects the current market and economic realities, particularly as worldwide confidence has dived. Many of the fundamentals still signal growth, such as the fact that the economy in London is bucking the national trend and growing at a reasonable rate. Also there remains demand for offices in all sub markets. For example, Colliers reports that availability in central London has declined to a 30 year low and Grade A space is down 17%.

Another way of looking at it is that net absorption in the West End in the first quarter of the year was at the fastest rate since 2005. Mike McKeith of Colliers commented: “Competition for Grade A space will remain the key driver of rental uplift during 2011. Absorption appears to have peaked in the city and is close to doing so in the West End. We expect to see increased absorption of good quality second hand space as Grade A becomes scarcer.” Tony Joyce of GVA notes that the “market has been quiet for some months although there are lots of requirements.” Even so, the serviced office market continues to perform strongly with officebroker.com reporting a 20% increase in deals in April-June compared with the same period a year ago.

That can be evaluated against figures from Capita Symonds that take up in the second quarter in central London was below average, with the City down 36% on the same period of 2010 and the West End down 9%. Another shift in the balance of the market is the increased amount of prime residential development which cost consultant EC Harris calculates at £21 billion over the next nine years in a total of 9,000 units.

Wanting it green

Sentiment in the key Thames Valley market of Reading will be boosted by the competitive bidding for PRUPIM‘s Green Park campus.

At the moment the expected price is around £400 million although that may not be the final figure. The bidders are substantial enough, (such as Delancey, Blackstone and MSREF) to make a deal effective. Indeed there is considerable potential because one third of the planned 204,380 sq.metres (2.2 million sq.ft.) still has to be developed.

In the past few years there has been a move towards town centre lettings in Reading to the detriment of the business parks, but this may well change as the availability of Grade A space declines.

Meanwhile, Reading Council is again looking for a substantial amount of space in the centre. While the general situation throughout the country is for local authorities to cut spending, Reading has a problem with its staff at the civic centre in Dusseldorf Way who are exposed to an asbestos problem. The current thinking is that the council will take a building of 7,897 sq.metres (85,000 sq.ft.), which is about 30% less than planned three years ago when the high construction costs stopped the scheme.

The council will have to develop the new civic centre but it also has the opportunity to trade its existing site. One new scheme in Reading is RO Developments’, in association with Urban Switch, refurbishment of the 1,440 sq.metres (15,500 sq.ft.) Napier Court office building in Napier Road, adjacent to the railway station. Refurbishment will be completed by the autumn and the property is being offered as a leasehold or freehold. Rhodri Shaw of Strutt & Parker, joint agents with Parkinson Holt, said: “RO‘s flexibility and realistic pricing, coupled with Napier Road‘s proximity to the railway station and outstanding parking levels will provide occupiers with the best of in-town and out-of-town locations.”

One recent large letting has been Capita taking 2,233 sq.metres (24,040 sq.ft.) in Schroder Exempt Property Unit Trust‘s New Century Place through Lambert Smith Hampton.

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Spreading a little happiness

West London has benefited from the market improvement in the capital which could bolster growth along the Thames Valley. That has led to rental increases in such centres as Hammersmith where Grade A space is now £339 a sq.metre and a return of the development cycle. Ever quick to spot a development opportunity, Stanhope is negotiating with the Irish National Asset Management Agency (NAMA) to buy the former headquarters of Gillette.

The 10.5 acre site was owned by Bonnington Group who had aplan to build a 500 bedroom hotel and offices after paying £30 million for the Grade II listed Art Deco building. Stanhope is bidding £15 million for the Isleworth site. Another Art Deco gem is due for refurbishment with Cathedral Group and Development Securities buying the London Business Park, Hayes, Middlesex from JER Partners, Blackstone and Resolution. The new owners intend to spend £250 million on the park, which was the former headquarters of EMI, the music Group.

The estate was designed by one of the most successful designers of Art Deco buildings, Wallis, Gilbert & Partners, who were also responsible for the Hoover Building and the Firestone Factory, now demolished, both in West London, and Victoria coach station. Sadly many of the buildings, said Cathedral, have been forgotten and the park is “a special place that had not been recognised by its previous owners.” Cathedral‘s Richard Upton said: “This site is part of the magic of the UK‘s industrial and architectural history, but it has been hidden and forgotten for decades.” So his crusade is to uncover the park‘s heritage and restore its full glory. As part of the development, the amount of commercial space will increase from the current 69,675 sq.metres.

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Long recovery road

The Thames Valley office market is ratcheting up steadily as the recovery broadens and speculative activity is renewed. That brought a strong first three months of the year with a surge to a record performance, said King Sturge (who have now merged with Jones Lang LaSalle). It calculated a 37,996 sq.metres (409,000 sq.ft.) take up, which beat the five year average andwas a 37% rise on the same period of 2010. The encouraging change for long term growth is that total availability declined by 10% compared with a year ago to 641,010 sq.metres (6.9 million sq.ft.). Piers Leigh of Jones Lang LaSalle commented: “Due to the slow progress of large transactions, we are still forecasting a slightly below average take up for the year of 139,350 sq.metres (1.5million sq.ft.).”

He noted Grade A supply could fall to a critical level in west London which means rents will rise. For the future we have seen a significant rise in speculative development with four key schemes within the M25 under construction or due to start within the next six months.” Knight Frank highlights the dominance of manufacturing and pharmaceuticals which account for a third of total demand. It also noted that active demand declined in the first quarter by 14% to 472,119 sq.metres (508,201 sq.ft.) after a numberof requirements were satisfied.

While the agent welcomes the rise in speculative development it believes that it will be limited and confined to prime locations. According to Knight Frank, Maidenhead had four deals in the first quarter, the largest being 4,645 sq.metres (50,000 sq.ft.) to Adobe in Market Street in the centre of the town which only completed in the final three months of 2010. As far as the M25 market is concerned, the agent cautiously predicts a 5% increase to 213,670 sq.metres (2.3 million sq.ft.) this year compared with 2010 but expects little change on the total for the M4 and even a 15% decline in the M3 take up.

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