UK regions still fragile
DTZ’s second-quarter reports on the market for office space in the UK regions show that occupier sentiment clearly took a turn for the worse in many cases, and tenants were hesitating to commit to deals. While 2009 probably marked the lowest point for occupier sentiment overall, it still remains fragile.
Apart from the Leeds offices market, where the public sector has a number of large and credible requirements, public-sector demand has been limited following the cuts announced in the Budget.
Take-up is due to reach bottom in 2011 overall and to remain subdued over the medium term across UK regional markets. Transactions in Q2 fell back in all markets, apart from Glasgow, where several longstanding Grade A requirements in the city centre completed during the quarter – this performance is not expected to be repeated in Q3.
The divergence between Grade A space and secondary buildings is set to continue, DTZ believes. During Q2 the availability of Grade A space fell back, maintaining prime rent levels, as tenants took advantage of the current market to upgrade to better-quality space, while the overall availability of office space edged upwards. In Manchester, where there were several releases of Grade B space onto the market, Grade B availability actually jumped 40% in Q2. But the almost complete absence of a development pipeline and continued upgrading by tenants to better-quality and more efficient space means that Grade A supply will come down quite quickly, DTZ says.
Landlords are expected to begin cutting the level of prime incentives in some locations at the end of 2010. In Manchester, the reduced availability of well-located Grade A space has led some landlords already to consider cutting incentives. Headline rents are expected to be maintained in 2010 for almost all regional markets at broadly the same levels as those seen in Q2, and for some this flat trend is set to continue into 2011.
