DTZ sizes up the non-prime office market
New research from DTZ has concluded that nearly 70% of UK office stock is poor-quality, secondary floorspace – Grade C. In contrast to what you might think, availability of this class of office stock is only 3.5%, much lower than for Grade A (12%) or Grade B (19%) properties – but this is set to increase, the firm says.
DTZ expects availability of Grade C office stock to grow in regional locations as occupiers move up to Grade A and B properties following lease events. Landlords are offering significant incentives to tenants to upgrade and a significant shift from Grade B to Grade A has already been observed in the nine key regional office markets, it notes.
Beyond the City of London, there will be little appetite for development of these lower-grade properties, DTZ says. There is development interest in 14% of City Grade C stock, with few non-office sites available for redevelopment, but in regional markets, developers have more options, and DTZ expects this to lead to difficulties in recycling unwanted stock. And as non-prime property is collateral for much of the £300bn or so in property debt in the UK – and workouts of loans against non-prime property still have a long way to go – it is important to size this market, DTZ points out.
In total, Grade A properties account for about 9% of UK stock while Grade B makes up a further 22%. But outside the main office markets in the UK, these figures drop to less than 4% for Grade A stock and 11% for Grade B.
Minor UK markets, where low levels of development activity have resulted in only small amounts of modern stock, contain the highest proportion of Grade C properties (85%). In London, beyond the City and City fringes, there is also a high proportion of Grade C office stock (68%), again as a result of low development activity in most locations except the West End and west London. In Central London, Grade C space accounts for 54% of all stock, as here the value of land has justified a higher level of development and also superior build quality, the firm notes.
DTZ conducted a bottom-up assessment of nearly 3,000 buildings in Birmingham, the City and City fringes in London, and Reading, as representative markets for the whole of the UK. It used a variety of sources to extend its analysis to the rest of the UK, assuming a certain relationship between quality and age of the office buildings in these other markets.
