Office pre-letting returned in strength during the first half of 2015, led by a spike in demand from the banking and finance sector, according to CBRE, the commercial property and real estate services advisor.
In many of the core regional cities, pre-letting has returned in strength, with professional service firms in particular taking advantage of the new generation of office buildings that are about to emerge. Whilst some markets saw a steady flow of deal activity taking place during the first half of the year, there were a selection of stand-out cities where transactional volumes were particularly high, including Manchester where a total of 657,009 sq ft of office floor-space was acquired for occupation in 145 transactions.
Strong economic growth and widespread business confidence during 2015 have resulted in strong levels of occupier take-up, most notably across the key cities of Manchester, Birmingham and Leeds. Deals from the banking and finance sectors (19%), along with business services (16%) and professional services (24%), accounted for 59% of total activity in H1.
CBRE reports that Manchester is one of the UK cities that has benefited from an acceleration of office take-up by financial and professional services and a strengthening of pre-letting activity with
PwC’s pre-let of nearly 50,000 sq ft at No.1 Spinningfields being a case in point.
Neil Mort, Director of Office Agency at CBRE Manchester, comments;
“Strong demand has characterised the Manchester office market in the first half of 2015. The total of 657,009 sq ft is very healthy, only circa 130,000 sq ft adrift of the highest level recorded in the same period last year. Compared to the historic levels, it is 30% higher than the five half yearly average and 41% above the ten half yearly average. Healthy demand is partly being driven by a combination of north shoring as well as a gravitation towards the city centre.
“Looking ahead at demand, Freshfields, who have taken an initial 42,739 sq ft at Arndale House in Manchester city centre will expand to 100,000 sq ft next year and Talk Talk has acquired 100,000 sq ft at Soapworks in Salford Quays. There are a number of large active requirements at present including Addleshaw Goddard (55,000 sq ft), Squire Patton Boggs (30,000 sq ft),Irwin Mitchell (30,000 sq ft) and Egencia (15,000 sq ft).”
CBRE reports that total availability in Manchester city centre has remained stable at 2.32m sq ft. This is almost the exact same level as it was 12 months ago. Given the volume of space due to be delivered in 2016 and 2017 (2016 – 440,000 sq ft, 2017 – 574,000 sq ft) any further developments are likely to be pre-let driven.
Neil continues; “There won’t be an oversupply of Grade A space. Of the space being delivered circa 140,000 sq ft is already taken, with a further 46,000 sq ft under offer and active requirements of circa 300,000 sq ft targeting this space. In addition to new build supply, there is a limited amount of refurbished stock about to come to the market with schemes including Hanover Building, Royal Exchange and 30 Brown Street, although we believe there is a clear gap in the market for further refurbishment projects to come forward.
“Prime rents hit £32.50 per sq ft last year and we are now seeing this level achieved more consistently. We expect prime rents to reach £34.00 per sq ft in isolated cases by the end of 2015. Incentives are now more deal specific. The pace of change of standard incentives is slowing although there is more differentiation between the most and least generous packages offered.”
Manchester has remained the focal point for investment into regional office markets in H1 2015 with leading transactions including the sale of 3 Hardman Square in Manchester for £91.7m and demand continues to build.
Will Kennon, Director of Capital Markets at CBRE Manchester, comments;
“The Manchester office market is continuing to attract strong levels of interest, with demand being led by UK Institutions who are typically stealing a march on some would be overseas investors, who have on occasion not been able to react to the relatively short timescales many UK Institutions have been able to transact within. The origin of overseas appetite is widening, with interest evident from geographies including China, South America and the Middle East in addition to the more familiar overseas investors from Germany and mainland Europe.
CBRE reports that deals currently under offer into H2 2015 are in excess of £300m including two major off market transactions and that whilst the yield differential between Manchester and the South East has narrowed during H1, there remains strong investor demand for exposure in Manchester, driven by evidence of strong rental growth across all sectors of the market.
Will continues; “Investors rightly consider the resilient long-term rental performance in Manchester and consider it a hedge against the volatility that sometimes can be seen in London and the South East. We are also witnessing Institutional investors willing to undertake more proactive asset management as a means to achieving desired returns through the acquisition of secondary stock suitable for refurbishment and re-positioning. Prime yields have moved in from 5.50% at the end of H1 2014 to now stand at 5.00% and we anticipate evidence at 4.75% during H2 2015.”
