Poor quality secondary office floorspace accounts for almost 70% (721m sq ft) of total UK office stock, according to new research by DTZ[1]. This report considers quality of office space, defined in terms of grade A (prime), B (good quality secondary) and C (poor quality secondary). It reveals significant variations in the proportion of grade C space across the UK office market.
The highest proportion of grade C stock is in the minor UK markets (85%) where low development activity has resulted in only a small amount of modern stock. London outside the City & Fringes also has a high proportion (68%) due to low development activity in most locations except the West End and west London. In central London, where the value of land has justified a more intense level of development and superior build quality, grade C space accounts for more than half of all stock (54%). Grade C space in most markets exceeds the total amount of grade A and B space.
Grades A and B account for around 9% and 22% of UK stock respectively. Outside the main office markets the figures drop to less than 4% for grade A and 11% for grade B.
Martin Davis, Head of UK Research at DTZ added: “Our analysis suggests that over two-thirds of the UK’s office stock can be classified as poor quality secondary. This is based on a bottom up assessment of nearly 3,000 buildings covering 164m sq ft in Birmingham, London City & fringes and Reading as representative markets for the UK as a whole. This analysis was further extended to the rest of the UK by using a variety of sources and by assuming a certain relationship between quality and age of office buildings in these other markets”.
The research highlights that, contrary to popular belief, availability of grade C office space is lower than grades A and B. Despite doubling in regional markets since 2008, the proportion of grade C space that is available across major UK markets is estimated to be only 3.5%, compared to 12% for grade B and 19% for grade A.
In Birmingham, the report revealed that just over 50% of the city’s 15.4m sq ft of office stock was classed as grade C.
David Tonks, Senior Director, Office agency at DTZ in Birmingham, added: “The evidence confirms that there is active demand for grade C space in central Birmingham. The combination of cost constraints amongst occupiers and landlords willingness to accept lease drafting that insulates tenants from fluctuating property costs has ensured that the occupancy levels in certain city centre grade C buildings has remained largely unaltered over the past few years. In contrast, a large number of grade C buildings located on the fringe of the established city centre office market are struggling to attract interest from occupiers on any terms and it is these buildings where availability has increased markedly. The challenge facing the market is to find alternative uses that will remove the remaining grade C buildings from the market supply.”
DTZ expects that grade C availability will increase further in regional locations in the coming years. Grade A and B landlords are offering significant incentives to encourage grade C tenants to move on low cost or cost-neutral upgrades. This trend has already been observed in the big nine regional UK markets, as tenants have upgraded from grade B to A.
One solution to address obsolete grade C space is redevelopment. However, DTZ’s research shows that this is more likely in London City than in regional markets. In regional markets like Birmingham, developers have more options for redeveloping non-office sites, and consequently not much grade C office floorspace is likely to be recycled.
James Bladon, Associate Director, Investment agency at DTZ in Birmingham, comments: “Birmingham’s office market has a critical mass and openness that is attractive to investors. Equity investors, both domestic and overseas, are driving the prime market, with prices supported by limited opportunities, one of the few being our recent sale of Direct Line House in the city centre to Deka Immobilien GmbH.
“In contrast, the secondary market is constrained by a lack of credit limiting the number of willing and able purchasers, although there are some well-financed property companies and opportunity funds buying secondary building that can be turned into an institutional product, such as the sale of One Victoria Square to Salmon Harvester. However, for buildings with more fundamental problems, such as an off-pitch location or an obsolete specification that cannot be improved at a reasonable cost, there is very little demand and at almost any price. In the current climate, with no development and few alternate uses viable, the options for these buildings are limited, although hotel conversion is one, such as with Auchinleck House and Cumberland House.”