Tenants upgrading to longer-term, higher-quality office space at reduced cost – DTZ
DTZ says activity in the market for office space to let in Nottingham was very subdued in the third quarter, with only three city-centre transactions. “Occupiers are still often using lease breaks and expiries to negotiate better terms with existing landlords rather than pay to relocate,” the firm points out. Overall take-up of office space in Nottingham fell to 51,000 sq ft in Q3 and was almost entirely made up of Grade B deals, it notes.
DTZ says that some occupiers that had previously decided to take serviced office space in Nottingham have now opted to move into longer-term leases at cheaper rates, taking advantage of the current market conditions. It expects overall take-up for 2011 to be lower than in 2010, however, as no “exceptional” deals are forecast in the final quarter.
With nothing new due to be built in Nottingham before 2012, DTZ expects a lack of well-located, good-quality space to push up rents from 2013 onwards.
Activity was much stronger in Leeds, where DTZ says Q3 take-up, although weaker than in the second quarter, was still much higher than the recent average. Some of the larger deals during Q3 were inward moves and expansions into Grade A space, as tenants took the opportunity to move into better space at reduced cost. DTZ expects that 2011 take-up in Leeds will be higher than for 2010, and forecasts a further increase in take-up for 2012.
The availability of Grade B space rose in Q3 as more units came to market, while the amount of available Grade A space dropped, in line with the increased lettings activity.
Average prime rents in Leeds remained at £25 per sq ft and incentives are still around 24-36 months on a ten-year lease, on average. The firm expects prime rents to remain unchanged for the rest of 2011 and then to rise from 2012 onwards. DTZ says that Leeds has a higher proportion of Grade A availability than most other regional office markets, but points out that many of these properties are in non-prime locations and have suffered as a result. It says rents on good-quality Grade B properties held firm in Q3 while rents on poor-quality stock in weaker locations “have also arguably found a floor”.
In Bristol, occupiers are showing more interest in highly-specified Grade B stock, “which offers more options and flexibility for mid-sized professional firms”, DTZ says. Take-up of office space in Bristol city centre dipped to 70,000 sq ft in Q3 and the level of Grade A lettings continued to decline. As seen elsewhere, activity remains focused on the smaller end of the market, with most transactions under 5,000 sq ft and no deals of more than 10,000 sq ft seen in Q3, the firm notes.
As in Nottingham and Leeds, tenants reaching lease events are seeking to take advantage of current conditions to upgrade to better-quality space at the same or even reduced cost, DTZ says. There is no consistent profile for headline rents in Bristol, as the tone is “dependent on the motivations of different landlords”. The firm says it sees no evidence, however, to suggest that it should change its estimated prime headline rent of £27 per sq ft for Q3. It notes that incentives remain significant, at around 30 months rent-free on a ten-year commitment.
DTZ says Bristol has 1.7 years of Grade A space at current take-up rates, and 2.8 years of Grade B supply. It expects landlords to harden their positions on inducements for prime stock if the amount of centrally-located Grade A space continues to shrink, and expects average prime headline rents to edge higher from 2012 “as the lack of well-located Grade A options becomes more of a significant issue”.
