Regional office take-up fell back to the long run average in Q3 following some exceptional deals in Q2, according to the latest DTZ Property Times UK Regional Offices report. Despite the overall fall in take-up during the quarter, some markets improved, most notably Newcastle city centre, where there was the strongest volume of lettings since Q1 2006. BSkyB took 37,000 sq ft of grade A space, which was the largest deal in the city centre in over five years.
The report highlights that while city centre take-up eased in Glasgow and Manchester, the out-of-town markets in the two cities performed strongly in Q3. The engineering and renewable energy sectors have been active in the Lanarkshire business parks, satisfying several long-standing requirements and supporting Scotland’s leading reputation in this field. In south Manchester, Shell took space and Etihad made an inward move to office space at Manchester Airport.
Martin Davis, Head of UK Research at DTZ said: “Sentiment remains fragile, given the uncertain economic outlook for the UK. This has led to extended decision-making procedures for the larger corporates. Most demand continues to come from smaller, indigenous professional firms that are occupying space at an increasing density and keen to relocate. These smaller firms are able to make occupational decisions more readily and are taking the opportunity to upgrade.”
Total regional availability crept up in Q3, but grade A was again eroded by take-up, maintaining average prime headline rents and reducing some incentives. The number of years of grade A supply at current take-up rates has been falling since 2009 and dipped to just below two years in Q3 Grade B availability increased slightly as more space became more formally marketed.
Alex Easton, Associate Director at DTZ in Cardiff, commented: “Despite poor market sentiment amongst developers and landlords alike, Cardiff’s office take-up, both in and out of town, surpassed many expectations in Q3 with close to 50 deals being concluded, totalling in excess of 165,000 sq ft. With the year end now in sight, total take-up is likely to reach close to 500,000 sq ft, which is more in keeping with pre-credit crunch levels, even excluding Admiral’s 195,000 sq ft pre-let from Q2. Including the Admiral deal, take-up in the city centre alone will ‘spike’ to a new, record level of 500,000 sq ft.
He continued: “City centre grade A availability is currently below 50,000 sq ft which, at current take-up levels, represents less than a single year’s supply. Due to patchy enquiries, static prime rents and continuing funding difficulties, there are no planned speculative developments in the pipeline and the lack of prime space is therefore unlikely to be addressed in the near future.”
Looking forward, the report states that the development pipeline across all the key regional cities, particularly for speculative schemes, is minimal. Consequently the divergence between the supply of grade A and grade B space is set to continue. Regional annual office take-up is set to fall in 2011 and 2012 with fewer exceptional large deals. The market is changeable and conditions are set to remain challenging for landlords, with the average deal size likely to stay subdued over the medium term. The market will continue to present opportunities for incumbent tenants to take advantage of prevailing market conditions when lease events occur.