Tenants remain cautious in regional markets – DTZ
DTZ’s Property Times updates for the third quarter examine several key regional UK cities, including Birmingham where the firm concludes that large corporate occupiers in the city are not rushing to make decisions. Sentiment is fragile and most current demand in Birmingham stems from occupiers upgrading their space and returning older, refurbished properties to the market. Third-quarter take-up of office space in Birmingham was 221,000 sq ft, driven by Grade B transactions, DTZ says.
The availability of Grade A space in Birmingham is set to decline thanks to the “non-existent” development pipeline, DTZ says. The firm expects headline rents for better-quality space to rise next year, which it says will trigger the return of further refurbished space to the market. “It is still very much a tenants’ market,” it adds, with current prime headline rents unchanged at £27.50 per sq ft and rent-free periods of up to 24 months on a five-year commitment in certain sectors. DTZ thinks achievable terms are likely to remain unchanged for better-quality space over the next six months.
In Manchester, DTZ says, activity in Q3 was focused on the south of the city, where some large occupiers have relocated and Etihad took 23,000 sq ft at Manchester Airport in an inward move to the region. DTZ says Aegis is also expected to make an inward move in Q4, taking 40,000 sq ft at City Tower.
Almost all deals in Manchester city centre in Q3 involved Grade B space. Take-up of office space in Manchester in Q3 was 157,000 sq ft. DTZ says that current requirements suggest take-up will rise in 2012, after a dip in 2011 caused by a very active 2010. But with several government departments cutting back staff and set to release space as a result, the firm thinks that overall availability will decline at a slower rate than the weak development pipeline suggests.
The 1 St Peter’s Square development is the only scheme in central Manchester confirmed as going ahead from 2012. DTZ says the large prime floorplates it will deliver are likely to have an impact on prime rents in the city centre. The firm also notes that several of the pre-lets expected in Manchester are likely to require a rent of £30 per sq ft to go ahead.
Meanwhile in Newcastle the market for office space was extremely active in the third quarter, leading to the strongest take-up there since Q1 2006 at 87,000 sq ft. This total was boosted by the 37,000 sq ft letting to BSkyB at Wellbar Central, which DTZ says is the largest deal in Newcastle for more than five years. The terms of the deal were undisclosed, so DTZ has no evidence that they will alter its estimate of prime headline rents of £20 per sq ft, which it says is likely to remain in the medium term.
The out-of-town enterprise zones in Newcastle are expected to continue to achieve a much higher volume of occupier transactions than the city centre, as there are “outstanding” incentives available there on Grade A space, DTZ says. The city centre pipeline is very limited. As in Manchester, a major rationalisation of the 3m sq ft government estate in the region is expected, which means that any decline in availability in the medium term will only be gradual, the firm notes.
Although the rising activity seen in Newcastle in Q3 will boost landlord sentiment, DTZ says, it notes that tenants are still cautious and most deals are being done at under 5,000 sq ft – the end of the market where occupational decisions can be made more easily. The firm points out that some landlords with properties that have large floorplates are considering breaking them up into smaller units, in order to meet this type of demand. DTZ also says that while most landlords are not in a position to offer cash to tenants for fit-outs, “those that do continue to be at a distinct advantage”.
