Latest analysis from leading property consultancy CBRE shows that demand for office space across Scotland grew significantly in the second half of 2013. The resumption of a more sustained period of economic growth and a renewal of business confidence has translated to a clear upturn in leasing activity during 2013.
Take-up levels have been boosted by a number of larger floorplate transactions across the country. These larger deals all contributed to the strong performances in Glasgow, Edinburgh and Aberdeen. However, CBRE’s research also reveals that there has also been an increase in the number of smaller floorplate deals favoured by small and medium sized enterprises (SMEs). For many regional cities, deals to this group of occupiers form the bedrock to a strong and sustained office market.
Andrew Marston, CBRE’s director of Research for National Office Markets commented: “Occupier data for the second half of the year has demonstrated that business confidence within the UK’s largest cities is gradually improving. The risks that prevented many businesses from committing to acquiring new office space over recent years have now eased, and that situation is increasingly being reflected in enquiries and done deals.”
In Glasgow, total take-up in the final quarter of 2013 reached an exceptionally high 367,500 sq ft, bringing the H2 total to almost 509,000 sq ft. Within this Scottish Power made a pre-commitment on its 220,000 sq ft standalone HQ on St Vincent Street where construction is now underway and is the largest deal in Glasgow’s city centre for a number of years. As a result the total for the full year is 709,806 sq ft, the highest annual total for the Glasgow market since 2007.
Given the level of take-up in Glasgow, total supply of space is diminishing with availability now close to falling below the 2million sq ft level where it has consistently been for the last five years.
There is currently 369,000 sq ft of Grade A space available, however, the three new speculative office developments (St Vincent Plaza, 110 Queen Street and 1 West Regent Street) are all due for completion during 2015 and collectively will add 470,000 sq ft to the supply of space.
Audrey Dobson, senior director in CBRE’s Glasgow team said: “2013 saw the Glasgow office market rebound with take-up reaching pre-recession levels. Improved occupier demand is set to continue against a back drop of increasing economic confidence. Grade A supply is eroding and is likely to lead to a reduction on incentives offered to occupiers and a hardening of rents during 2014. The outlook for the city is positive as it is set to benefit from the completion of three new speculative office developments during 2015 which have already seen pre-let activity.”
There has been substantial improvement in investor sentiment towards commercial property investment in Glasgow with increased bidding activity. Following a strong Q3 there was a surge in activity towards the end of 2013 which is spilling into 2014. Overall investment volumes in 2013 totalled £223m, of which almost three-quarters took place in the second half of the year. This was more than double the volume of stock transacted in 2012.
In Edinburgh the second half of 2013, and in particular the third quarter, was characterised by a significant upturn in take-up with the total reaching 446,000 sq ft, an increase of 46% on H1 2013 with the full year take-up sitting at 749,662 sq ft. This has been characterised by a series of deals to banks of which the largest saw Sainsbury’s Bank taking 83,400 sq ft at Edinburgh Park. Elsewhere Bank of New York Mellon took 54,600 sq ft at Capital House in the Exchange District, which is a consolidation of its previous two offices. The second half also saw PwC sign for 32,278 sq ft at the newly developed Atria One.
Overall investment volumes in the capital across the year totalled £333.5m with over 60% of this occurring in the second half of 2013.
Given the weight of deals during 2013, there is now a clear downward shift in supply across Edinburgh, ending the year at 2.38m sq ft, a 13% fall over twelve months. There has been a slight change in sentiment towards speculative development with those sites that can deliver product within sensible timescales, such as 6 St Andrew Square and Quartermile, back on the radar as potential developments.
With the demand and interest in Edinburgh’s prime office space remaining strong, rents have edged up to reach £28.50 per sq ft, although deals on the best suites have exceeded this. While overall supply remains at a reasonable level, it is companies seeking accommodation of over 20,000 sq ft who will face the greatest challenge.
Stewart Taylor, senior director in CBRE’s Edinburgh office, said: “Take-up in H2 2013 was at its highest level since 2004, with the statistics boosted by an unusually large number of out of town transactions. The city centre is now clearly under supplied and the pre-lets predicted are now happening. Speculative development is inevitable and those schemes offering the greatest certainty of delivery will be best placed.”
The office investment market in Edinburgh has seen continued strong levels of activity in the second half of the year with a number of large deals completing. During the last six months there has been £204m of stock transacted, bringing the total for 2013 to £333.5m, the best year for Edinburgh office investment since 2007.
Take-up in the Aberdeen office market reached 421,823 sq ft in the second half of 2013, driven by the continued high level of investment in the North Sea. This brings total take-up for the year 2013 to 709,291 sq ft, of which CBRE advised on 240,145 sq ft, representing a third of all office market transactions in Aberdeen. Whilst still high by historic standards (28% up on the ten year average), the 2013 total was 14% down on the exceptionally strong 2012.
There was 437,622 sq ft of office space available in Aberdeen at the end of 2013, a small decrease on the position at the end of 2012. Larger requirements can now only be catered for through pre-letting in the development market, so the pace at which supply levels had been falling has eased a little. Nevertheless availability of ready-to-occupy Grade A space remains exceptionally low.
Prime office rents remain at £31.50 per sq ft, although they are likely to increase with the two 8,000 sq ft West End office redevelopments on Queens Road. It is expected that good quality secondhand space will see further rental growth with a continued narrowing of the rental gap between prime and secondary space.
Derren McRae, managing director of CBRE in Aberdeen commenting on the Aberdeen market: “Aberdeen once again witnessed exceptionally strong take up levels in 2013 with demand continuing to stem from the buoyant energy sector. We anticipate further major lettings to take place in 2014 as occupiers look to improve working environments to attract and retain the best staff in an increasingly competitive labour market.”
The second half of 2013 has seen £184.4m of transactions in the Aberdeen office investment market, up from £71.4m in the first half of the year, giving a total of £255.8m. The key deal of last six months was sale of Union Plaza for £54.82m to Legal & General.