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.”

Still buying

CB Richard Ellis (CBRE) makes the point that 77% of the take up in the first six months of the year was in second hand space. At the same time, the imbalance in supply worsened as second hand space took a larger proportion of the 259,293 sq.metres. CBRE’s Will Ventham said: “It is unlikely that, apart from Two Snowhill, any new speculative space will come to the market in the foreseeable future, albeit Goodman may be reviewing options at Eastside.” On the other hand, the appetite for investments is undiminished.

CBRE’s Justin Marshall commented: “The appetite for larger, prime assets in the central business district from the UK and overseas funds should continue, while the stabilisation of rents and incentives should see the return of a number of funds and property companies to the market for more asset intensive buildings.”

Setting a benchmark

A key investment sale, of One Piccadilly Gardens, would set a new benchmark for Manchester if Europa CapitaI goes ahead with the suggested purchase from Irish investors.

The 13,935 sq.metres (150,000 sq.ft.) mixed use complex is one of the properties expanding the boundaries of the business district. The price would give it a yield of 6%, which is a top rate for the city.

It is well over a year since the last significant investment deal when Luxembourg based Aerium bought 3 Hardman Street, Spinningfields for £180 million and a yield of 6.25%. One Piccadilly Gardens is the type of prime, well let, property that will appeal to foreign investors.

Even so, the price is no improvement on what it sold for six years ago. Peter Skelton of Lambert Smith Hampton said of the current market for investments that: “We have crossed the threshold of investment buying as it moves out of the south east.”

As far as the letting market is concerned, he said that there have been an encouraging number of smaller transactions. He added that some substantial new developments were “on the cards.”

According to Knight Frank’s ROMP survey, the office vacancy rate in Manchester is 15% For comparison, it is 12.4% in Birmingham, 10.9% in Bristol and 11.4% in Leeds.

Axa acts

A further boost to confidence in Manchester has come from Axa Real Estate Investment Managers going ahead with the £50 million St Peter’s Square project. Axa manages this on behalf of the Co-operative Insurance Society and will replace Peterloo House with a 12 storey, 10,033 sq.metres (108,000 sq.ft.) building designed by Squire & Partners with WHR and CBRE as letting agents.

Equally as important is that KPMG has taken a pre let on 1 St Peter Square, further boosting confidence in the city centre, said Chris Mulcahy of Jones Lang LaSalle. He noted that city centre first half take up was 16,258 sq.metres (175,000 sq.ft.), which was below average.

“I expect the full year to be around 60,385 sq.metres (650,000 sq.ft.). There is a growing shortage of Grade A space,” he added, ”with Spinningfields’ existing buildings almost full.” He believed that developers would take advantage of the situation and start on new schemes, as illustrated by the Co-operative.

Andrew Timms of Edwards & Co said: “The market has not been as bad as we expected and I believe the year could see take up of over 65,030 sq.metres (700.000 sq.ft.). We also have some substantial schemes in the pipeline, such PRUPIM in Lincoln Square and ING’s plans for 250,000 sq.metres (2,690,998 sq.ft.) on the edge of Spinningfields.”

ING is seeking a development partner, on behalf of the West Midlands Metropolitan Authorities Pension Fund, for the project, which will transform the linked Byrom House and Astley House buildings into one large scheme. Also on the horizon is a major project by Siemens for its 21 acre site at Princess Parkway, where it is also seeking a development partner. The site, on the outskirts of Manchester, could house a 92,900 sq.metres (1 million sq.ft.) mixed use scheme. It will include a new 9,755 sq.metres (105,000 sq.ft.) office for Siemens plus an energy centre.

Another positive event is an Indian call centre taking 3,716 sq.metres (40,000 sq.ft.) in an Aegis property in the city centre.

Confident

Taking advantage of the strong market, Moorevale and its funding partner Rockspring has started on the refurbishment of the 4,645 sq.metres (50,000 sq.ft.) 65 Southwark Street. Joint agents are Farebrother and Jones Lang LaSalle. Farebrother is also the letting agent for the 2,787 sq.metres (30,000 sq.ft.) 90 Chancery Lane, WC2 which is due for completion by the end of the year. Farebrother’s Alistair Subba Row said: “Office supply in Midtown has been falling for three quarters and will continue to do so for the rest of the year. Developers and investors should feel confident that new and refurbished space will let well.”

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Shortage looms

Even though the number of new schemes has increased, Midtown and the Southbank are still beset by a shortage of prime office space The result, said a report by EA Shaw, is that rents are increasing and have reached £618.70 a sq.metre (£57.50 a sq.ft.) in the WC2 area. Relief is at hand for supply with a number of large schemes completing before the end of the year, such as 1 Kingsway, Castlewood at 85 New Oxford Street and 11 Strand. EA Shaw’s Charles Killen said: “Market conditions continue to encourage an increase in small and medium sized refurbishments.

With a number of significant schemes due for completion in the latter half of this year and in 2012 across Midtown, Southbank and Soho (but not ready immediately), rents look set to rise in the next few quarters.” The development pipeline in Southbank is dominated by the Shard and The Place but there is a healthy appetite for new schemes in the area, such as Chelsfield and London & Regional’s scheme for 116,125 sq.metres (1.25 million sq.ft.) of mixed use space including residential for the Elizabeth House site adjacent to Waterloo Station.

With the appointment of David Chipperfield as thearchitect, this is likely to be a landmark project. Chelsfield’s Yair Ginor said: “We have taken a daring approach with the new scheme and have told the architect to think about Waterloo Station and to focus on public realm improvements.” Not surprisingly, Midtown is a popular area for investment, one of the latest being the purchase by the Canadian pension fund, Ontario Municipal Employees Retirement System (OMERS) of a 50% share of MidCity Place from Beacon Capital Partners for a rumoured £142 million. It is part of the policy of OMERS to broaden its European investment base. The property will go into its Oxford Properties Real Estate subsidiary. Also on the market is the former Reuters headquarters at 85 Fleet Street which is being offered by Pramerica, the investment arm of Prudential Financial of the US, through Jones Lang LaSalle for close to £80 million.

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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.

Landing on Pegasus

Colliers has joined Fisher Hargreaves Proctor in marketing the expansion of Pegasus Business Park, a venture of East Midlands Airport and MAG Developments.

The 20,903 sq.metres (225,000 sq.ft.) office park will have a new 216 bedroom Radisson Blu hotel later this year and has another 25 acres available for high class offices. FHP’s John Proctor said: “When it was launched, the park proved to be highly successful and it remains one of the biggest in the region, but, in terms of the regional office market, it has slipped from the mind’s eye somewhat.” He suggested a new promotional campaign will work now the park has a new hotel adding to the attractions of being equidistant between the three major conurbations in the East Midlands.

Mastering the motorway

Looking ahead beyond the tough economic conditions, East Renfrewshire Council, Scottish Enterprise and Patterton SPV (in Administration) has appointed Jones Lang LaSalle (JLL) to prepare a master plan and economic assessment for development sites along the M77 corridor. JLL said it is designed to challenge future land use assumptions and identify options that will help long term sustainable economic growth in East Renfrewshire and the city region. Craig Wallace of JLL said: “The study will seek to identify short, medium and long term actions, as well as considering deliverability from a planning, technical and market perspective.”

Miller Developments is certainly taking the long view and is backing this up by buying sites. It has bought the 120 acre former home of the Hillman Imp car at Linwood from the Receivers of Mountgrange. The site has planning permission for a mixed use scheme but Miller is now discussing prospective schemes with the local authority.

One long term problem increasingly rearing its head is the shortage of Grade A office space throughout the UK. Mike Buchan of JLL said: “In contrast, Grade B office space carries significantly more downside risk for landlords and, while we have seen many significant releases of this type of office space by occupiers, we expect its level to remain inflated. “

Clearly the logic of the market is that more Grade B space will be refurbished or converted, some to residential use. Interestingly, some commercial values are being cut in central Glasgow, as witness two potential restaurant/retail sites in Mitchell Street, close to the top shopping venues of Buchanan and Argyle Streets.

Mark Broderick of James Barr said: “The market has quietened down compared with 2010 and is subdued with deals taking longer to complete. This is a good time for potential occupiers, but they are putting off moving.” One property that has come onto the market is the 4,162 sq.metres (44,800 sq.ft.) former Virgin Media call centre at 60 Maxwell Street, a stand alone property on a landscaped site. It can be leased or purchased through JLL.

Major scheme for Weybridge

One of the largest office developments in Surrey is planned by Rockspring and Exton Estates with a 9,596 sq.metres (103,296 sq.ft.) scheme at the Arrows, Weybridge. The Grade A project named Velocity is on a site which Rockspring UK Value Fund bought from Mercedes for £4.25 million in January. It will have 370 car parking spaces. Rockspring’s Richard Bains commented: “We are confident that, in selected locations, now is the right time to bring newproducts to the market, putting us ahead of anticipated competition.”

Also in Weybridge, Verint Systems has leased a 1,918 sq.metres (20,648 sq.ft.) office from the Merseyside Pension Fund through agent Hurst Warne. There is a long rent free period and the rent is £247.48 a sq.metre (£23 a sq.ft.).

Plans for the regeneration of the sanofi-aventis site in Dagenham have moved forward with the appointment of Savills as advisers on the scheme. This is a major project on

108 acres and Mark Bass of sanofi-aventis said: “Our focus throughout the process of creating a lasting legacy has been to work with proven experts in regenerating commercial/scientific premises in an effort to transform the site into a facility that offers long term benefits to the people of Dagenham.”

Savills’ Neil Rowley commented: “Our master planning expertise will deliver a planning consent that enables such a legacy to be delivered.” Overall management of the regeneration (the existing operation ends in 2013) is with SOG Ltd. Another company, ARCADIS, has already commenced the routine clean up of the manufacturing site.

A master plan for the regeneration process is being drafted with an emphasis on creating new jobs and new business opportunities. Multiple uses are under consideration including office space, laboratory/research & development facilities, manufacturing, warehousing, retail, health and leisure. Once a major manufacturing area dominated by Ford, Dagenham has widened its business horizons. For example there are large sheds for the logistics business. Wolseley, the plumbing business, leased a 13,011 sq.metres (140,000 sq.ft.) shed in Choats Road recently. Driven by the upcoming Olympic Games, there has been considerable development in the area. Another scheme is for a Creative Industries Quarter on an industrial site close to Barking town centre on Abbey Road.

This will have a mix of residential and commercial space developed in two phases around a series of courtyards and riverside spaces that have direct links both to the existing urban developments to the east and the future sites to the west. The plans also encompass the proposed East London transit bus route and a new bridge over the River Roding.

The development, which is designed by Cartwright Pickard Architects, is due to go on site this year. It will have four blocks of 272 units of residential housing together with commercial/office, retail and creative industries uses, new ublic amenity space and a riverside walk.

Cambridge on the up

The demolition of an existing building on Station Road, Cambridge ahead of a new 7,153 sq.metres (77,000 sq.ft.) building being developed by Brookgate for Microsoft Research is a symbol for this thriving university town.

Apart from anything else, it is such a prominent site that it casts a spell over the area, where there is already some refurbishment occurring. On top of this it is the first new office block in Cambridge for 25 years and the rent of £317.42 a sq.metre (£29.50 a sq.ft.) beats most parts of the UK apart from central London. Underlining the force of the scheme is that Orchard Street Investment Management has bought it for £37 million. Orchard Street’s Gary Felce added to the arguments for Cambridge by saying: “It sets a new tone and standard for the next wave of development to follow.” The student blocks, which are part of the scheme, have also been sold in a £40 million deal with LaSalle Investment Management.

An upbeat view of the market comes from Duncan Quig of Lambert Smith Hampton who points to “the imbalance between demand and supply and the increasing rental tone for offices which is allowing speculative construction.” An example of this is Pace Investments’ 4,831 sq.metres (52,000 sq.ft.) Botanic House, Hills Road where rents could touch £349.70 a sq.metre (£32.50 a sq.ft.) when it is completed in a year’s time. But the top rent could be achieved before then because Pace is apparently negotiating for floor by floor lettings. In any case there are potential

occupiers seeking new space, such as the law firm Mills & Reeve.

Static rents

Static headline office rents in Leeds could affect the timing of new development. At the moment they are set to stay at £258.24 a sq.metre (£24 a sq.ft.) for the rest of 2011, said Knight Frank. This is below the peak of 2009 because of a decline in demand illustrated by the 45% drop in take up last year, said KF’s Alex Munro. Even so, an interesting pointer to the future in Leeds will be when BAM decides to go ahead with its 10,684 sq.metres (115,000 sq.ft.) building adjacent to IVG’s No1 Leeds, which is slightly larger.

King Sturge has joined Knight Frank in letting this property. The firm’s Richard Thornton said: “The building offers large floor plates as well as part floors and is ideally placed to capitalise on various occupier break clauses and lease expiries we have identified this year.” Also being launched is the mixed use property, Indigo Blue, located at the junction of Crown Point Road and Hunslet Lane. It has residential units and 945 sq.metres (10,173 sq.ft.) of offices. It has been developed by Merlin Properties and is being marketed by WSB Property and Sanderson Weatherall.

Morrisons lease office

Having a major company headquarters in an area helps the commercial property market. Morrisons, the supermarket group, provides a classic example of this for Yorkshire. In its latest transaction, through Edward Symmons and Savills, it has leased an 807 sq.metres office at Great Eastern House, Junction 7 Business Park, M62 Leeds. The office is for Morrison Facility Services and is on a 10 year lease. Richard Corby of Edward Symmons said: “This is a sizeable letting for the Leeds out of town market at present and, coupled with the recent lease renewal of another existing tenant, it is clear that this business park remains an attractive location for occupiers.” That is proven by the fact that there is only one small building still available at the business park.

Classic Bruntwood

With its long history of refurbishing large offices, Bruntwood now proposes to revitalise the 11,148 sq.metres City House, Leeds. The plan is for a substantial rebuilding of the 14 storey building to construct a new entrance foyer and mezzanine reception with concierge style service. Bruntwood’s Craig Burrow said: “We are currently finalising our designs and expect to submit a planning application very soon. The specification will be Grade A as we target BREEAM Excellent rating but it will be priced to appeal to a wide range of occupiers. He added that Bruntwood had a 96% occupancy rate on its Leeds properties. “We aim to spot the potential that exists in parts of the urban fabric that others may disregard.”

Training companies set pace

In a slowly recovering market in Leeds, there is evidence of a shift in demand that has pushed training companies into seeking more space. That is good for the local economy and indicates a reaction to increased employment prospects but it also has a further significance, suggests Jeff Pearey of Jones Lang LaSalle. “It shows that what training companies provide is essential and that is recognised by the government who have, in effect, privatised part of the service to ensure that school leavers and older people are catered for.” He added that this is a good time for any occupier seeking space because there are “attractive deals available.”

Unlike some other parts of the UK, Leeds is not running out of prime office space. Figures from JLL show that take up in the first quarter was only 3,530 sq.metres (38,000 sq.ft.) with smaller sized deals continuing to dominate. “There will be an improvement in the second quarter,” said Pearey, ”because there are several significant deals coming through. The market feels better than a year ago and there has been an improvement in viewings.” The national picture has improved considerably with the second half of 2010 seeing a 36% rise in lettings in six top regional markets to a total of 510,950 sq.metres (5.5 million sq.ft.), reports JLL.

Training companies also featured nationally as seeking more space. Savills’ first quarter figures for development activity in the UK show that a large part of the country is considerably less active than London and the south east and that March saw a significant decline. The decline in development is mainly due to the public sector reducing its activity. According to Knight Frank in Leeds, prime rents will remain at £258.24 a sq.metre (£24 a sq.ft.), a decline of just over 10% since the peak of 2009. Alex Munro of Knight Frank commented: “Take up last year was 26,291 sq.metres (283,000 sq.ft.) or 45% below the ten year average.

New Grade A space available in the city centre was about 51,095 sq.metres (550,000 sq.ft.), which gives a vacancy rate of 11.6%, unchanged in the fourth quarter over June-September.” There is, however, a positive aspect to the figures because active demand is put at a healthy 39,018 sq.metres (420,000 sq.ft.).

Smooth Ride for the OlympicsApart from the demands of growth in the City, there is also the looming Olympic Games next year which will put pressure on

Apart from the demands of growth in the City, there is also the looming Olympic Games next year which will put pressure on the transport system. This applies particularly to Upper and Lower Thames Streets which will be kept clear for the movement of Olympic dignitaries. The objective of the City of London “is to keep central London ticking over.”

While the major institutions feature so much in the performance of the Square Mile, there is also a need to support small businesses with 85% with City businesses employing less than 50 people. The City is looking to support these businesses through promoting new initiatives such as the Government backed Innovation Warehouse scheme and through introducing guidance packs for SMEs setting up in the City.

Shoppers Flock In

The City of London’s promotion of a broader economic base with increased leisure and retailing has been justified in spectacular fashion in the past year with the opening of the New Change retail complex. This is at the core of the move to a ‘seven days a week’ shopping offer which is gradually widening away from Cheapside to include peripheral areas. New Change, with its 58 shops, (30 of which have never been in the City before), has proved very popular with the 300,000 visitors in December, which despite the poor weather was a figure higher than anticipated. To add to the attractions of hopping, the City of London is seeking powers to allow trading as part of street events, which could prove attractive with the City’s easier parking for cars at the weekend. In time it is hoped that all the retail areas will link, from West (Cheapside) to East (Spitalfields) drawing in the historic Leadenhall Market which is 600 years old this year. The City of London has invested £6 million in the area around New Change to improve the environment, including widening the payments.

Maintaining the pace

All the pieces of the jigsaw are in place for the City to enhance its reputation as the top financial centre with plans for major new developments, the completion of the cluster of skyscrapers and the provision of a considerably broader range of retailing and leisure facilities.

The feedback from the Barbican Residents Association has underpinned Hammerson’s plans for the two building St Alphage House, London Wall which is being designed by MAKE. For Peter Bennett, City Surveyor, this is coming at the right time when there are sizeable requirements in the market which mean pre lets. St Alphage House is one of a number of schemes in a year which promises to be particularly active at a time when city employment is increasing again. Among other schemes in the pipeline are Helical Bar’s 26,012 metres (280,000 sq.ft.) Mitre Square and Exemplar’s 23,225 sq.metres (250,000 sq.ft.) at the London Fruit and Wool Exchange, Spitalfields.

The provision of improved education and leisure facilities is coming through with an international class Guildhall School of Music with a 600 seat concert hall as part of Heron’s residential scheme at the former Milton Court building. The past few months have seen a number of confidence boosting decisions for the Square Mile’s financial standing, such as:

• UBS is to move into a new 74,320 sq.metres (800,000 sq.ft.) complex at Broadgate;
• Bloomberg is to take 46,450 sq.metres (500,000 sq.ft.) in a development of the Bucklesbury Island site and another sizeable chunk will be built speculatively.
• Further funding to complete the Pinnacle skyscraper;

Other schemes at 6 Bevis Marks and 10 Moorgate. The City of London has been particularly supportive of these schemes. The encouraging factor is that there are other large requirements in the market from insurance, legal and banking organisations. Bennett said: “The sentiment is that there is money to be made in the markets and that businesses want to express themselves through new buildings.”

Demand from Banks

One encouraging factor for investors and developers is that demand for office space from financial groups in 2010 exceeded the period before the recession. Knight Frank believes that there will be continued demand from banks over the next three years. The firm’s William Beardmore-Gray said: “There are financial firms we talk to who want to acquire offices and expand in London and need to act ahead of approaching lease expiries in 2014 and 2015.” On the other hand there is some concern among banks that new government regulation may affect their business. But the picture is encouraging for developers and the deals are coming through, such as Axa Real Estate Investment Management (REIM) teaming up with Favermead for speculative development of 19,974 sq.metres (215,000 sq.ft.) at 60 Holborn Viaduct,
the site of the former Bath House. The new building, designed by Kohn Pedersen Fox Associates, will be completed
by 2013. As far as the rest of the Midtown market is concerned, Charles Killen of EA Shaw said: “There has been a bit of a buzz about the market since we came back after Christmas. Buildings that aroused little interest before then now have a
number of interested parties. It is a little volatile but we expect a steady year as the vacancy rate (now 5%) falls further.”