Gap to widen between prime and secondary office space – Jones Lang LaSalle
The gap between primary and secondary office property to let is set to widen this year, says Jones Lang LaSalle. The firm’s Q1 research into the UK office market highlights the continued rationalisation of portfolios by large occupiers and says that take-up volumes “represent more churn than net absorption”.
The firm’s UK Regional Office Rental Index rose 0.7% in Q1 as prime rents stabilised across all markets, apart from offices in Cardiff and the Western Corridor, which saw some limited growth in rents. JLL expects the intensifying shortage of Grade A supply to continue to support limited prime rental growth in the regions. It forecasts growth of 2.7% per year overall during 2012-2016 in the major UK cities. The Western Corridor (office space in West London and Thames Valley offices) is forecast to outperform this, with a predicted growth rate of 4.3% per year during this period.
The polarisation of rents between prime and secondary properties will be exacerbated by the continued shortage of Grade A supply and the overhang of secondary product, the firm notes. The best space could see average rental growth of 2.2% in 2012 but JLL’s forecasts of IPD data indicate “much more limited growth of just 0.2%” for the wider market.
Jones Lang LaSalle has already seen some existing office space allocated for alternative uses, with about 500,000 sq ft of Birmingham offices withdrawn for other uses during 2011 alone. It expects more office stock to be allocated for change of use by the end of the year, as obsolescence of existing stock accelerates.
The supply of Grade A office space, by contrast, continued to fall during the first quarter of this year in most UK locations. At the end of Q1 there was 1.3m sq ft of office space under construction speculatively across all UK regional office markets, the firm notes, and just 360,000 sq ft is due to complete this year – largely confined to the Western Corridor. “With the development pipeline so low there is great potential for refurbishment of existing stock,” JLL adds. “Changes in sustainability legislation, workplace technology and corporate office requirements mean there is a significant amount of space on the market which, although available, is unlikely to be suitable for office occupation.”
“Speculative bank finance will be limited over the medium term, but partnerships with occupiers will open up pre-let funding and alternative sources of overseas equity offer some potential,” it adds.
The firm notes recent forecasts that office job growth will be flat this year across the UK as a whole, but says that structural lease events will provide some stability in regional markets. JLL estimates that 60% of take-up activity in the big six regional markets last year was lease-event driven. “In 2012 alone we track 10.0m sq ft of structural lease events in the core regional markets,” it adds. “While continued uncertainty may drive occupiers to restructure existing leases, structural demand will remain the key driver of activity this year.”
