Property experts at DTZ in West Midlands review the 2014 commercial property market and look ahead to 2015:
WEST MIDLANDS INDUSTRIAL MARKET
‘Industrial take-up levels increase by 9% in resurgent market’ – John Sambrooks, Associate Director in DTZ’s Industrial agency team in Birmingham, comments:
“2014 saw the continued resurgence of the West Midlands Industrial market with take-up levels of buildings over 50,000 sq ft in the first three quarters of 2014 reaching 4 million sq ft, an increase of 9% over the same period last year. As a result, availability has dramatically fallen from 25 million to 21 million over the 12 month period.
The 2013 market was driven by the automotive sector which has continued during 2014 with JLR securing 225,000 sq ft at Prologis Park Ryton, Coventry however the dominant sector of 2014 was Retail as evidenced by a number of the year’s significant deals. This year saw the letting of Goodman’s 323,000 sq ft Citadel building in Bilston to on-line sports retailer Wiggle for their new UK distribution facility HQ. The growing online food shopping market saw Asda acquiring a new 120,000 sq ft dark store at Minworth and further afield H&M acquired the first new build to suit building at the joint Segro/Roxhill Development called Rugby Gateway, having signed up for a new 225,000 sq ft building. Speculative development continues unabated and where development has taken place buildings have been let on or before completion such as UPS securing the latest 152,500 sq ft speculative building at IM Properties, Birch Coppice Tamworth setting a new rent of £6.15 psf. Birch Coppice was also home to the largest pre-let in the central West Midlands area with the letting of 778,000 sq ft to Euro Car Parts who have increased their occupation on the scheme.
The lack of existing buildings in the Birmingham area has led to the Hydraforce purchasing land at the Advanced Manufacturing Hub, Aston to develop a new 120,000 sq ft manufacturing facility.
Looking ahead to 2015 we anticipate seeing further speculative development in particular for the 50,000 sq ft + market with Goodman having recently announced plans to develop five buildings of 32 – 50,000 sq ft at Lyons Park, Coventry and further schemes in the pipeline. We expect landlords will continue to harden their position on the incentives and lease terms for good quality Grade B and Grade A space due to the lack of opportunities across the market which will see further increases in Grade A rents.
We anticipate seeing increased demand from occupiers who are affected by the HS2 route, as the date for Royal Assent and construction edges closer. Landlords that have invested in refurbishing existing buildings will benefit from their investment as occupiers look to more quickly to secure the best available building.”
BIRMINGHAM OFFICES MARKET
‘The prospects of any speculative scheme are improving’ – Andrew Berry, Associate Director in DTZ’s Office agency team comments on the Offices market:
“At the outset of 2014 there was a general expectation that there would be further significant change in market conditions building on the improvements that were evident in 2013. Occupier sentiment continued to improve as a result of improving economic condition and the DTZ Office Agency team was predicting that during the second half of the year the improving sentiment and general take-up of better quality space would eventually impact on quoting terms across the number of sectors in the market.
As the year unfolded the market conditions improved steadily until the news that HS2 was to acquire 100,000 sq ft at Snow Hill 2. This caused the balance to tip in favour of the landlord and the remaining Grade A schemes in the city immediately revised their quoting terms. The HS2 transaction and the further news that Birmingham had also won the HS2 college represented a huge vote of confidence in Birmingham and helped to demonstrate the city’s ability to recruit talent from across the wider region. On a smaller scale there were signs of continued improvement in sentiment as the balance of occupiers were now seeking to secure premises that allowed for expansion and recruitment that further eroded the stock of grade A and good quality grade B premises. The general direction of travel suggests that there will be a discernible improvement in market conditions as we enter 2015 however this will be tempered by the tenant’s ability to secure premises that fit their occupational brief.
Landlord confidence continues to improve. Incentives on better specified product have fallen by up to 50% over the course of the year and this is likely to diminish further as 2015 progresses and there is further stock erosion. With increased confidence amongst both landlords and tenants better quality space within the central Birmingham market, there is now starting to be an upward trend in quoting rents. It is likely that pre-let conversations will commence this year and new prime headlines established in 2017 however given the lack of new build grade A in the city it is unlikely that this evidence will be created until the new wave of development starts to complete. In contrast, the modest amount of demand for poor quality tertiary space has resulted in a continual outward drift in achievable terms. On the supply side the diminishing stock amongst Grade A and Grade B accommodation is largely attributable to the net absorption of space within the city centre and the absence of any significant refurbishment activity and the well reported gap in Birmingham’s development pipeline. There is also a gradual decline in the availability of Grade C accommodation. During 2014 over 100,000 sq ft of tertiary space however by the end of 2014 or the early part of 2015 there could be a further 300,000 sq ft also removed from the central core market for alternative uses.
Take-up during 2014 within the central Birmingham area was almost 625,000 sq ft which is broadly in line with the long term average and represents a second year of improved take-up since the low point in 2012 when take-up reached 502,000 sq ft. Over 125 transactions were completed during the year involving an average headline rent in excess of £15 psf. During 2015, there are over 200,000 sq ft of lease events involving Grade A accommodation, although over half of the occupiers in this bracket are either already in discussions with their landlord or have relocated to new accommodation. Based upon active demand in the market it is obvious that occupiers have expanded their horizons from purely cost control to a more aspirational business plan that will assist in raising the profile of the business and attracting the best talent to their organisation. The financial and engineering sectors are expected to be the most active occupiers during the next 12 months.
The continued shift in demand towards better quality space will serve to highlight the diminishing supply of better quality accommodation and improve the prospects for any refurbishment or redevelopment scheme that can fill the evident gap in Birmingham’s supply pipeline. Furthermore, the prospects of any speculative scheme are improving as funding becomes more readily available from a wide range of sources and more participants enter the market. In summary, the improving market conditions will doubtless provide opportunities for both occupiers and investors and the increase in corporate activity and the relocation of HS2 will doubtless bring new enquiries to the central Birmingham market from fringe city locations and from other cities, thereby reaffirming its position as the regional capital.”