Savills Winter 2011 Office Report: muted demand, restrained development
Savills is encouraged by the current availability of office space in most UK cities, which it says continued to fall during 2011. The overall UK vacancy rate has declined to 9.4% from a peak of 15.3% in 2009, it notes in its Winter 2011 Office Report, and average years of supply across all UK cities now stands at 2.9 years.
The firm says the restrained development pipeline for office space in the UK will help to compensate for subdued demand levels during 2012. It notes that many occupiers have sought to re-gear existing leases at break options or to take short extensions at expiries, as they are trying to avoid incurring capital expenditure through moving to new properties. Demand for offices in the City of London is below average; in the West End, demand is in line with average levels; and elsewhere in the UK the picture is mixed, but the overall picture is for below-average demand levels. Savills expects that for 2011, the 12 areas it covers will see overall take-up falling 54% from the 2010 total. The expected public-sector austerity programme will be “a major drag on confidence” in many regional office markets, it notes.
Once demand for office space does increase, Savills says the lack of available finance is likely to restrict the amount of new development, and points to refurbishment as one way of maximising letting potential.
Savills notes impressive growth in rental levels in the Cambridge offices market (+10%) and the M25, driven by the M4 corridor, (+18%) during 2011, thanks to a shortage of Grade A office space and strong occupier demand for certain types of stock. Although no drastic improvement in rents is expected in many regional cities this year, the firm does expect rental growth to accelerate in these markets moving into 2013.
“We expect the Central London office markets will show some of the strongest rental growth over the next 12 months, with top rents increasing by 3.8% in the City and 4.2% in the West End in 2012. However, the market predicted to the see the biggest growth during 2012 is the M4 corridor with an expected 4.5% growth,” Savills notes.
