Posted 6 August, 2014 OBI BLOG
The Manchester city centre investment market has been described by many as “red hot” with a significant number of landmark office buildings changing hands during the first half of 2014. But is this sentiment being reflected in the occupational office market.
On the face of it, with take up for the first half of the year totalling 801,513 sq ft it would appear so, but when drilling down into the detail it reveals an interesting insight in to the true activity within the marketplace.
In Q2 2014, the city centre enjoyed its most active quarter since 2007 with office take up totalling 487,639 sq ft. This figure is up from 194,235 sq ft in the same period during last year.
The increase in demand was greatest in the large floor plated, Grade A sector which has accounted for 334,370 sq ft (42%) of the space transacted so far in 2014. The most notable transaction and one which represented the largest deal for over a decade, was OBI’s acquisition of 58 Mosley Street (104,000 sq ft) on behalf of the Australian based law firm Slater & Gordon (click here to read more about the letting). Other significant Grade A lettings this year include; Barclays Bank (81,603 sq ft) at Piccadilly Place, Trader Publishing (60,216 sq ft) and Ford Capital (24,753 sq ft) at First Street and Towergate Insurance (34,775 sq ft) at 3 Hardman Square, Spinningfields. It has been a remarkable first half of the year for large lettings when considering that back in 2012 the largest deal for the whole year was only 24,000 sq ft!
Manchester’s ability to attract major inward investment received a huge boost this year with Trader Publishing, Towergate Insurance, Slater & Gordon and Ford Capital all relocating their UK headquarters to the city ahead of other UK locations. The ability to attract inward investment is another factor that adds to the appeal of Manchester for many of the UK’s funds and investors seeking investment opportunities outside of London.
We thought the Grade A supply and demand dynamics reached a “tipping point” back in June 2013 and the recent spurt of large transactions have further exacerbated the problems being caused by the under supply of new space. Whilst 1 St Peters Square will deliver 195,000 sq ft of new accommodation to the market in August, named demand continues to significantly outstrip available supply. Occupiers such as DLA, EY, NCC, Gazprom and Addleshaws are all still looking for new premises comprising in excess of 40,000 sq ft. Combining this indigenous demand with the flow of new entrants into the Manchester office market means the future looks bright but we need to remember that only the right developments should be brought forward. We should not get carried away – the last boom proved that a good market cannot underpin a poor location.
Allied London has begun the speculative development of The Cotton Building in Spinningfields. The penultimate piece of the Spinningfields jigsaw, this building has elevated the traditional office design to new levels in an attempt to cater for the growing demand among forward thinking corporate organisations and the TMT sector. The building will provide 148,100 sq ft of new workspace when completed in early 2016 and we believe the concept and timing of this offer will prove extremely successful in a time when the approach to the workplace is quickly evolving.
Other schemes set to commence later this year are Muse Developments, One New Bailey and Tristan Capital / Ask’s, 101 Greengate scheme which will provide 125,000 sq ft and 170,000 sq ft respectively.
Whilst the Grade ‘A’ sector is particularly buoyant, other sectors of the city centre market are also showing signs of improvement, albeit not on the same scale.
The central core proved the most popular area for occupiers with 31 transactions totalling 161,000 sq ft. Of these, 29 transactions were sub 4,000 sq ft showing that this area is still dominated by small to medium sized occupiers. Landlords who are both willing and able to offer flexibility in lease terms and suite sizes are capitalising most significantly on this demand.
Out of the 104 transactions undertaken so far in 2014, only 14 lettings (12%) were completed at rents over £20 psf. However, these 14 lettings totalled 341,447 sq ft of space let (42%) which further emphasises the polarisation of the market with larger occupiers more willing to pay rents to secure large and high quality existing space.
The improvements in the market outlined above are beginning to feed through to quoting rents and incentive levels across the city. This is particularly evident in the Grade A sector, where due to the reduced supply, headline rents have moved from £30.00 to £32.00 per sq ft in schemes such as 3 Hardman Square and 1 St Peter’s Square. In May, OBI were involved in a new letting at Aerium’s 3 Hardman Street where a new headline rent of £32.00 psf was secured and is further evidence of the improving ‘top end’ of the market.
Whilst the increase in rental tones has yet to really hit the refurbished sector, the hardening of incentive levels continues, with discounts rates of circa 20% now commonplace on new lettings.
Despite the lack of transactions for space in excess of 10,000 sq ft in the refurbished sector during the first half of 2014, the prospects for the second half of the year appear much more favourable. We are aware of a number of confidential requirements for good quality buildings offering large efficient floor plates that need to be satisfied later this year which will further boost overall take up figures.
New schemes such as Bruntwood’s Deansgate & Quay building totalling 52,000 sq ft and the 60,000 sq ft Sevendale House in the Northern Quarter as well as Churchgate and Lee on Oxford Road could be vital to plug the gap in the immediate supply pipeline within the city.
Another indicator of the improving confidence within the general business community is the number of existing city centre occupiers acquiring expansion space. Economic Solutions at Churchgate House, Aegis at City Tower, and Sainsbury’s at Arndale Tower are just a few examples that have further boosted take up levels and squeezed supply.
The larger end of the Manchester office market looks set to continue strongly due to a healthy list of occupier requirements and the lack of stock should keep dealing terms relatively tight. However, the refurbishment market that deals with the day to day churn remains very competitive and landlords need to work on providing a unique product and service offering that differentiates their building from the main bulk of the competition. We are convinced there is a new way of working on the horizon and from our experience Manchester has a business community that is embracing this change – it remains to be seen however, if landlords are prepared to cater to this demand and change their conventional approach to office refurbishment.
OBI Property are extremely active in the Manchester office market and we would be delighted to discuss the market or any specific queries in further detail – please do not hesitate to contact a member of the Offices team 0161 237 1717.