The opportunities for growth and return on investment in the office market in the Midlands Engine region are abundant, according to national property consultancy Lambert Smith Hampton (LSH).
The Midlands Engine Office Market Report 2017 focuses on eight key regions in the Midlands Engine area: Birmingham city centre, Birmingham out of town, Coventry, Derby, Leicester, Nottingham, Milton Keynes and Northampton.
Adam Ramshaw, LSH’s head of Birmingham and the East Midlands, said while macro events, such as the Referendum, had the potential to disrupt the office market, the occupier and investment markets have remained resilient. Now the region is poised to be buoyed further, thanks to Royal Assent for HS2 and the election of the West Midlands’ first mayor, who will drive investment.
“It’s encouraging to see some real depth to demand with the number of deals being transacted remaining healthy in many of our markets,” said Adam. “Investment appetite is also unwavering, with investors responding to occupier demand where developers are not.”
The report points to the chronic shortage of grade A office stock in many locations across the Midlands Engine region, but points out that developers are not yet sufficiently confident to embark on any speculative development.
Birmingham city centre is bucking the trend, thanks to improvements in transport infrastructure, which are boosting inward investment and acting as a catalyst for speculative office development.
It has just over one million sq ft of available grade A supply, which equates to 3.1 years of grade A supply. This is ten times more than other key markets in the Midlands Engine region, which are lagging behind.
Across the combined eight Midlands Engine regions, office take-up in each of the three quarters to Q1 17 underperformed the quarterly average by about 20% because of a lack of larger deals, which stems from uncertainty in the corporate sector, particularly in professional and financial services, following the Referendum. However, the smaller end of the office market continued to be busy, with healthy levels of activity.
The report reveals that Coventry/A46 corridor was the outstanding Midlands Engine region for office take-up for the 12-month period, up 33% compared to its 10-year annual average. Two other areas – Birmingham out of town and Northampton – experienced take up that is 10% and 11% respectively ahead of average.
Northampton was home to the region’s largest deal over the past 12 months, with Opus Energy’s 85,000 sq ft lease at John Drydon House, while Coventry’s performance is as a result of TATA Technologies’ 63,000 sq ft deal and National Grid’s 50,000 sq ft transaction.
In contrast, a lack of large deals in Birmingham city centre resulted in take-up 20% below average over the same period, with the largest deal in the second half of the year being Pinsent Mason’s 19,448 sq ft lease at 19 Cornwall Street. Nevertheless, the number of deals was up compared with the same 12-month period in 2015.
Refurbished premises have helped to alleviate supply pressures in Milton Keynes, Birmingham out of town and the A46 corridor. However, the report says that it offers investors with a detailed knowledge of the markets a real opportunity to viably reposition assets and capture pent-up local demand.
LSH says it expects to see an improvement at the larger end of the office market in 2018, following a quiet 2016 and early 2017, because there will be 160 lease expiries and breaks above 5,000 sq ft across the region’s key markets, amounting to just over three million sq ft of potential demand.
“Although a significant proportion of lease events will not result in a relocation, it will be an essential trigger of demand, particularly for occupiers of dated or poor quality space,” explained Adam.
“The risk is that without the appropriate supply in place to attract this latent demand, occupiers will have little choice but to stay in situ, even if there is a desire to upgrade to an alternative building.”
While Birmingham city centre will see almost 20% of its stock subject to a lease event between 2018 and 2020, there is less potential elsewhere in the Midlands Engine region. LSH reports that the total volume of lease events in Leicester, Nottingham, Derby and Northampton, is less than 10% of stock.
“Nevertheless, if all of this were to result in transactions, it would translate into a very strong level of take-up,” said Adam. “The main issue in these markets is one of an acute lack of grade A supply. Without the provision of quality space, there will be little incentive to drive relocation.”
He added: “The granting of Royal Assent for HS2 and the election of the West Midlands’ first mayor have given the region a galvanising force of progress over and above political uncertainty. The opportunities for growth and return on investment are abundant in the Midlands Engine region, we just need to be strategic about how we approach them. With this in mind, a forensic understanding of the market remains critical.”