According to a new report from Savills, the UK regional office market (excluding central London and the South East) sees rents remain stable despite muted levels of take-up as a result of the Covid-19 pandemic. This can be attributed to record low vacancy rates, which at present average just 7.5% across the big six regional cities (Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester).
Current supply across the UK regions stands at 11.3 million sq ft (1.049 million sq m), 44% below 2009 levels. Consequently, the long term outlook for rental growth remains robust. Savills extensive analysis shows that historically Grade A rents are able to withstand downward pressure when the vacancy rate remains below 13%. Forecasts suggest that the big six cities will remain under this threshold until at least 2023. In addition, it is unlikely that supply constraints will be alleviated in the short term with 61% of the development pipeline under construction already pre-let.
Clare Bailey, director in the research team at Savills, comments: “What’s clear is that the fundamentals of the regional office market in 2020 are markedly different when compared to the last recession in 2009. For example, supply remains low, with Grade A space, particularly in Leeds and Glasgow, reaching critical levels. Whilst take-up has undoubtedly reduced this should not, at least in the short-term, have a significant impact on rents, with some cities even seeing potential growth due to a lack of new development and the removal of excess Grade B and C stock as a result of Permitted Development Rights.”
2020 started strongly with regional office take-up in Q1 21% up on the same time period last year and the 10-year quarterly average. However, following the UK-wide lockdown activity has slowed with H1 total take-up reaching just 2.061 million sq ft (191,473 sq m). Whilst this is a 36% decrease on H1 2019, figures have still surpassed the previous lows experienced during the global financial crisis (GFC) between 2009 and 2012. Only Aberdeen and Bristol bucked this trend, seeing a 30% and 16% increase respectively on H1 2019.
Savills notes that across the UK take-up has been dominated by the technology sector, accounting for 31% of the total figure. This is significantly up on the preceding five year average of 18%. Key tech hubs including Cardiff, Bristol, Birmingham and Manchester have seen deals to disruptor banks such as ClearBank in the first half of 2020 and Monzo, and Starling Bank in 2019.
Jon Gardiner, national head of office agency at Savills, adds: “The first half of 2020, particularly since the end of March, has undoubtedly been challenging and as the uncertainty continues, it is likely to remain that way. However, given the supply crunch in the market we believe that we are much better placed to weather this storm then we were during the GFC. Notwithstanding this, it would be remiss not to acknowledge the shift to greater home working as something that is here to stay and is likely to impact every type of occupier’s space requirements moving forward. Yet despite this, it is clear that businesses that have had their staff return to the office have seen first-hand the benefit of collaboration and human interaction, which have both proven invaluable to many following months in lockdown.”