Amid ongoing concerns that the North West’s Grade A supply is approaching a new low, and an increasing focus on flexible space in the region, what is the current outlook for the office market? Move Commercial explores both ends of the office space spectrum and looks at how a new phenomenon could provide a valuable stop-gap or revolutionise professional workplaces.
Since the second half of 2009, Grade A office space availability in Manchester city centre has plummeted from around 600,000 sq ft to just under 100,000 sq ft at the close of 2015, with only 294,954 sq ft available for let across the entire city.
The drop in supply is intensified by the yearly increase in demand throughout the city for Grade A, which is expected to remain high.
While office developments are in the pipeline, 2015 recorded one of the lowest years for completed projects offering square footage and 2016 is set to produce around 200,000 sq ft; some of which is pre-let.
It’s feared this lack of ready office space may bring about Colliers International’s forecasted “complete absence” of Grade A by Q2 this year.
But is the outlook really this poor for Manchester and the North West’s office market? What is in the pipeline to provide space this year? And what are the forecasts for development?
Colliers’ study and a report by Savills in December highlighted the lack of conversion in Manchester, and the latter showed little development in the pipeline that is due for completion this year with only 600,000 of a planned 3.6 million sq ft actually under construction.
Savills’ ‘The Future of Manchester’ report predicts the city centre will continue to attract high specification new builds and that the Oxford Road area will become a sought-after location for developers of Grade A and mixed-use schemes, due to its proximity to universities and rail stations.
“Across the North West we have seen a significant increase in demand for Grade A offices during the past few years which is a reflection of the recovering economy,” explains Phil Mayall, development director at Muse Developments.
“There is a general regional trend towards city centre take-up as companies look to acquire more efficient space close to transport hubs and amenities.”
Three schemes are due for completion this year; XYZ Building, One New Bailey and 101 Embankment, which will bring a total of 436,302 sq ft to Manchester city centre, however 225,000 sq ft of the space is currently pre-let.
“In Manchester, supply of Grade A and good quality refurbished office developments remains tight and demand is indicating that it will likely experience a potential shortage in the near future,” adds Mayall.
“However, well positioned schemes that are in construction are picking up lettings as evidenced by One New Bailey and the One City Place development in Chester. Both schemes have more than 50% of space in legal hands.”
For the whole of 2015 only 10% of Liverpool office space completed was Grade A, including The Watson Building and The Department.
“There is a real shortage of both Grade A and good quality refurbished office stock in the city region and with no new office schemes in the development pipeline due to start on site this year without pre-commitment, then it is likely that Liverpool will be without any new space until the end of 2018 at the earliest,” says Ian Steele, director at Bilfinger GVA.
“This means that both indigenous and inward investment occupiers will potentially be faced with limited options when it comes to the acquisition of new space or relocation and expansion.”
Liverpool’s office availability has been gradually declining since 2012 while demand has remained stable; however a lack of speculatively built commercial offices is evident amid a dominance of second hand or Grade B–D space in the city.
The largest Grade A space is only able to offer 45,000 sq ft, with a total availability in Liverpool of 60,000 sq ft which is set to be downgraded to Grade B+ by the middle of the year as it’s more than five years old.
The main areas for new development in the city region over the next decade are likely to be focused around the waterfront and the commercial district’s Pall Mall, according to Bilfinger GVA.
Speculative development is on the horizon with 5 Princes Dock, for which Peel recently secured outlined planning permission to build 81,000 sq ft of space, however a pre-let of at least 50% commitment is required before work starts on site.
The majority of Liverpool’s office market is made up of flexi-space and second hand space, meaning most is refurbished property such as Capital & Centric’s Bunker Building, as the city aims to balance business occupants and the creative and technology sectors accounting for the majority of demand.
“Occupiers are increasingly wanting to acquire more efficient space on flexible lease agreements which have the ability to cater for new technologies and agile working,” says Steele.
The flexible office market has also been “consistently growing” in Manchester since the recession and now there is “a steady upward growth,” according to Charlie Beck, head of sales for serviced offices at Bruntwood.
“The main reason is the proliferation of small to medium enterprises (SMEs) which are going for the serviced offices,” says Beck.
“The other thing is that people are expecting more from the flexible space so they’re no longer settling for offices with just a meeting room; they’re expecting lounges, large communal kitchens and breakout spaces. Primarily, because people are more demanding, the space has improved.
“In Manchester there’s a real drive at improving the offer, it’s very competitive at the top end of the market for serviced offices and co-working spaces where operators are investing in the space and focusing more on design and fit-out.
“Whereas at the smaller end of the flexible market in Liverpool, it’s struggled because there’s so much vacant lease office space.
“People offering this will be so much more competitive and will make their space and their lease more flexible just to get rid of their vacancy.”
“Occupiers are increasingly wanting to acquire more efficient space on flexible lease agreements which have the ability to cater for new technologies and agile working.”
Currently there is a greater offering of flexi-space than Grade A but Beck suggests there’s a growth in demand for Grade A being renovated into flexible offices.
“A lot of the space that’s been created is within Grade A space and it’s often because smaller companies feel it’s important to create the right impression for clients and staff and are happy to pay a premium for that, and that’s where we’ve seen the growth in Manchester,” he says.
“A lot of the techy-types and new start-ups that look for more quirky space are looking for the smaller and flexible offices to start growing their business now things are starting to look more promising with the economy, by looking for serviced space and flexible leasing before moving onto more conventional space in a few years once they expand,” adds Daniel Barnes, associate at Savills.
An answer to the apparent lack of purpose-built space may be found in the residential market, as companies are now tapping into a niche allowing homeowners to rent their properties to SMEs, freelancers or creatives to be used as an office while the proprietor is at work.
Popular in the US, the model is gathering pace in London with expansion plans in place for the North West.
“There was a gap highlighted in the market regarding the lack of existing office spaces specifically designed to facilitate work that is flexible, easily accessible and convenient,” says Matt Beatty, CEO at Spacehop – an online platform allowing homeowners to rent properties to independent workers.
“We address these issues by offering inexpensive and flexible home-office spaces that fit individual needs.”
The drive behind this industry is the increasing freelance market, telecommuting (working from home/remote work) and independent workforces.
Intuit’s ‘Death of the Office?’ report show at least one 10th of the UK’s employment market telecommutes and employers are expanding into telework options.
“A lot of research has indicated there is a consistent rise in freelancing and the independent workforce, with predictions that by 2020 half of the UK’s workforce could potentially be self-employed freelancers,” says Beatty.
“Such an increase would, in turn, increase the appeal and demand for flexible co-working spaces.”
Homeowners aren’t required to change the purpose of their property to sign up to the scheme, as long as the space remains legally residential and utilised for that function only.
“With commercial real estate prices and occupancy rates being among the highest in Europe, we see amazing potential,” adds Dave Haber, vice president of growth and marketing at Breather – a US-based group expanding to the UK.