Occupier market in brief
Large pre-let commitments and speculative starts provide some optimism following low take-up in 2020
Total take-up across the Big Nine cities amounted to 5.6 million sq ft during 2020, which is 33% down on the ten-year average and compares to 6.2 million sq ft in 2009, the lowest annual figure following the Global Financial Crisis.
The city centre and out-of-town markets were affected to a similar extent and, in most cities, take-up was severely impacted by the pandemic. However, activity remained robust in Newcastle and Bristol, which fared the best of the nine cities.
Activity improved as the year progressed, with Q4 take-up amounting to 1.5 million sq ft, 25% down on the ten-year average but an improvement on the previous quarter and double the amount transacted during Q2, the spring lockdown.
During an unprecedented time of uncertainty for the office market, there were some encouraging signs of activity towards the end of the year. We have seen a number of pre-letting deals, such as 175,000 sq ft to BT in Manchester and 121,000 sq ft to Legal and General in Cardiff and on the supply side various speculative schemes across several cities have recently started onsite.
There has been a shift in sectoral activity during 2020. The strong demand that we have seen from central Government and flexible workspace providers in recent years, has understandably been much more subdued. Looking forward, the Government now seems committed to relocating 22,000 civil service posts outside London, as part of the levelling up agenda. The intention is to build more than the 15 hubs constructed during the first phase, with no indication that the project will be scaling down.
The flexible workspace environment however is likely to be more nuanced. Whilst a number of providers are seeing difficulty, we are seeing increasing evidence of occupiers looking to incorporate greater flexibility into their occupational estates – in our Fit for Future report, launched in late 2020, 85% of companies surveyed expect their estate to become more flexible. In light of this opportunity, and against a backdrop of IWG publicly closing offices, in Manchester we saw Deloitte take 35,500 sq ft at WeWork as well as Hana committing to additional space.
Whilst we have seen activity understandably muted during the course of the year, and a number of requirements shelved – we are of course in a recessionary environment - organisations are giving careful consideration to what they require from their office space. According to Fit for Future, 55% of occupiers expect their workplace to be redesigned to improve productivity, with 98% aware that health and wellbeing is an important strategic driver for their workplace. As a result, those occupiers who are able to take a longer term view – usually larger companies with larger requirements – are re-entering the market with renewed certainty around the type of the space they need to encourage better use of their office space in the long term.
Nevertheless, in the short term we do expect to see levels of availability increase, albeit from low levels, as occupiers look to mitigate cost. Total availability across the Big Nine reached the lowest point in 15 years during Q1 2020, having halved since 2013. 2020, however saw available space increase by 17%, with tenant space, a relatively small portion of the market, increasing by 71%. This trajectory is likely to continue in the short term, which will create a wider differentiation in rental tones between the prime and secondary markets.
There have been a handful of speculative schemes start construction in Bristol, Leeds, Manchester and Newcastle, totalling 900,000 sq ft. This is partly a function of the Brexit uncertainty of the past few years and the reluctance to build speculatively but also a recognition that this will be sought after by occupiers. As an example, the EQ scheme in Bristol is indicative of what occupiers will be looking for: well located, high quality space with particularly strong environmental credentials and large amounts of space devoted to health and wellbeing.
Headline rental levels have largely sustained throughout the pandemic and in some cases increased as landlords have held firm, although some rent-free periods have moved out slightly. This is supported by the MSCI monthly index which shows that average rental growth for regional offices increased by 1% during 2020.
Charles Toogood Principal and Managing Director, National Offices Team
TOTAL TAKE-UP IN Q4
1,574,854 sq ft ▼25%
Down on the 10 year quarterly average
5.6 million sq ft
1,031,735 sq ft
543,119 sq ft
HEADLINE RENTS AVERAGE
Across all nine cities
This report has been prepared by Avison Young for general information purposes only. Whilst Avison Young endeavours to ensure that the information in this report is correct it does not warrant completeness or accuracy. You should not rely on it without seeking professional advice. Avison Young assumes no responsibility for errors or omissions in this publication or other documents which are referenced by or linked to this report. To the maximum extent permitted by law and without limitation Avison Young excludes all representations, warranties and conditions relating to this report and the use of this report. All intellectual property rights are reserved and prior written permission is required from Avison Young to reproduce material contained in this report.