Looking back to the beginning of 2010, Grade A supply peaked with vacancy rates at 5.4% on average across the UK regional markets. Fast forward to today and the supply crunch has driven Grade A vacancy rates down to below 4% in the majority of the UK regional markets, and trending downwards.
The squeeze on Grade A office supply looks set to continue with just 38,000 sq ft of office space scheduled to complete this year, with no new space under construction speculatively in either Glasgow or Manchester. In spite of this, developer’s response to the impending regional office supply shortage remains limited.
With the exception of the Western Corridor and Manchester markets, the response has been muted, with no new speculative developments due to commence this year in the rest of the UK regional markets monitored. While we expect developers to begin positioning themselves strategically to take advantage of the impending shortage of Grade A supply; the lack of speculative development funding will mean that the pipeline will remain severely limited over the forthcoming year.
The Grade B market tells a different tale, with public sector cutbacks likely to result in further influxes of Grade B space. While we have yet to see any significant release of Grade B space onto the market, the level of Grade B supply is likely to remain inflated. Landlords are likely to face tough competition for occupiers, could well drive interest in the conversion of secondary stock to alternative uses such as residential, as supported by announcements made in the Chancellor’s recent Budget.
However, it’s not all negative news for Landlords. Prime rents increased in Birmingham, Glasgow and the Western Corridor in Q1, with rents stabilising in all other regional centres. We expect to see further prime rental growth of 1.1% for 2011 driven by the anticipated shortage of Grade A space. On the flipside however, the Grade B market remains at risk from further rental softening.