With Brexit day set and a potential interest rate hike on the horizon, economic uncertainty has resulted in a hesitation from commercial landlords and developers to invest in building new office stock across the UK. Where speculative building does take place, it tends to be through joint ventures or underwritten from local councils to reduce risk. From Glasgow to Bristol, and the big cities in between, a lack of new stock coming to market is creating challenges and opportunities in local commercial property markets. We look at how this is affecting both landlords and occupiers.
Supply and Demand Across the UK
The good news is that the commercial property sector is booming. Increasingly, businesses are identifying the benefits of setting up offices outside of London, which has resulted in an increase in demand for office space across the UK. Last year, Edinburgh saw record-breaking take-up of office space in the city, whilst Manchester has experienced its fourth consecutive annual increase in let office space. In Bristol, the demand for office space has resulted in cost for commercial space hitting an all-time high of £32.50/sq ft for One Cathedral Square. Whilst this is great news for landlords, the scarcity of new stock may start to squeeze tenant’s budgets. With a growing demand for office space, and less new stock being built, the pressure is on tenants to think about how to get the most from their existing space.
The result of demand outstripping supply is inevitably going to result in higher rents. The Grade A stock that comes to market will command the highest prices, but even refurbished space is pushing up prices. In Glasgow, the lack of investment in new property and a growing demand for office space has resulted in refurbished spaces commanding £28/sq ft – just £2/sq ft under Grade A headline rents. Property agents Colliers predict that Bristol rents will surpass £35/sq ft in 2018, with similar rises expected in Manchester.
With tenants expecting to pay more per square foot, they may start to rethink whether or not they need all of their space and could begin rationalising their floor plate. Some businesses have found that moving towards either agile or flexible working models, where the desk ratio is reduced in favour of more flexible workspaces, can reduce their required floor space. This allows tenants to make sure that their floorspace is providing the most productive return on their rents.
The Year of the Pre-Let
In Manchester alone there is an 18-24 month lag before the next tranche of new build developments are released. One solution, if your lease is up for renewal in the next few years, is to think ahead and consider a pre-let. In 2017, four of Edinburgh’s largest office space deals were pre-lets, and property consultants Savills are urging prospective tenants in Glasgow to consider pre-lets as the best solution to secure their desired office space.
Is It Time To Refurbish?
A lack of new Grade A stock may also result in occupiers with impending lease events opting to stay in their existing space and undertake a refurbishment. This is increasingly seen as an opportunity for tenants to review how they’re using their current space and see if they could benefit from refreshing their fit out or introducing new ways of working. This could result in tenants negotiating longer leases at renewal to ensure their investment in their refurbishment pays off in the long run.
Refurbishing doesn’t only apply to tenants. It’s also is a great opportunity for landlords to invest in capital works; either through refreshing common areas, the reception, change facilities or providing space for communal working. These new areas show tenants that their building is considered premium stock and could help landlords retain market-leading yields throughout the next lease cycle.