Supplying food for thought

We have just released our latest UK Occupier Conditions report which provides corporate occupiers with an overview of market conditions across 15 key UK office markets. There is much food for thought within the report, especially for those occupiers seeking to transact or implement transformation programmes across their UK portfolios over the near term.

Having written the report, it is clear to me that the most significant market challenge facing corporate occupiers going forward is the acute shortage of high quality stock in a number of core markets. The choice of prime office space continued to diminish over 2011 across a number of locations.  It is particularly constrained in London’s West End, West London and Manchester where Grade A vacancy rates are 2.2%, 2.7% and 2.8% respectively.

This dearth is certainly not being countered by an increase in speculative development right now.  Indeed the situation is so severe, that Grade A in-town supply (based on a five year average annual take-up discounted by 25% to reflect current below average market conditions) could run out in Bristol and Manchester as early as 2014 and in Birmingham, Glasgow and Edinburgh by 2015.

Developer sentiment (on the back of relatively low demand) and development finance (on the back of the ongoing difficulties in global financial markets) remains prohibitive to a short-term solution to this impending supply crunch.  Only 1.35 million sq ft of speculative space is currently underway in the core regional markets (0.7% of total stock), compared to around 5.6 million sq ft in central London (2.6% of total stock). Even with a moderate level of occupier demand, which is possible given improving sentiment, this will doubtless mean that the level of Grade A availability in the regions will fall further over the next year.

Of course this dynamic would not be apparent if one relied upon overall vacancy rate data.  Overall availability remains high in nearly all of the regional markets with vacancy rates ranging from 7.1% in Edinburgh to 18.6% and 27% in Birmingham and Liverpool. respectively.  But this does not, in reality, amount to increased choice for corporate occupiers, many of whom usually have highly specified requirements in terms of the type of space they wish to occupy. With the growing trend towards ‘smart working’ occupiers are increasingly looking for  large, modern floor plates to create efficient and flexible open plan office areas, as well as space for meeting room facilities and break out areas.  Current supply does not actively support the transformation strategies being conceived, and in some cases implemented, by corporate real estate teams across the UK

So in summary, whilst there is not a current shortage of overall space, there is certainly a shortage of the right type of space across many UK markets.  The inevitable outcome of this crunch is that occupiers will need to open alternative routes to sourcing product.  Look out therefore for a further intensification in rates of re-gearing / refurbishment and pre-letting negotiations.