Crunch time for Edinburgh’s offices

Edinburgh is rarely off investor watchlists but a space crunch in the city could put its appeal at risk. The development pipeline is thin and thinning. Should occupiers be unable to find the space they need, they will look elsewhere. And investors will follow.

It seems like a stark warning for a city that scores so highly for connectivity, sustainability and graduate retention. A high proportion of start-ups continue to make Edinburgh their home, build-to-rent growth is accelerating, the city is among the most discussed digitally, according to a recent ING Media study on Europe’s most talked-about cities, and it scores highly on sustainability in M&G Real Estate’s recent City Vitality Index.

But with limited new development coming through, continued success shouldn’t be taken for granted.

“Edinburgh is a powerhouse,” says Nick Penny, head of Scotland for Savills. “We have this fantastic city with a highly educated population, a really great quality of living that we all enjoy and great connectivity. With regentrification of the town centre, Edinburgh has transformed massively over the last 25 years.” But he acknowledges it is at something of a crossroads. “So where’s next? Is that an expansion to the north of the city? Is it beyond the bypass to the west? Where is this city going?”

Scale and quality

Speaking on EG’s latest Question Time Edinburgh podcast, Penny warns of additional challenges around transport infrastructure. But it is the limited supply of office space that worries him most.

“Where we’re looking to attract new investment in its broadest context into Scotland and into Edinburgh in particular, we may be hamstrung a little bit by the ability to actually provide the scale and quality of office accommodation that we might have to.”

Paul Curran, chief executive of developer Qmile Group, warns of a crunch too. “It’s been a fairly strong couple of years,” he says. “I’d say it’s probably slowed down slightly towards the end of this year with elections, uncertainty and everything going on, but it has been very, very strong.”

The main challenge, Curran adds, has been securing sites with so few available in the city.

“We’ve got our Haymarket scheme that we’re developing with M&G. So in terms of office pipeline, we are developing 390,000 sq ft of office space, which is significant in terms of the overall set of supply. It’s probably the key provider of office space at this time in the city. If you compare that to our previous development, QuarterMile, where there was another 400,000 sq ft, we probably developed that over double the amount of time that it’s going to take us to develop the Haymarket scheme. So that just gives you an indication of the lack of competition, lack of supply in the market at the moment.”

It requires developers to pay careful attention to timing delivery; from their point of view there is no advantage in delivering feast between famines.

“What we’re really looking at is where the market is going to be in 2020 and beyond,” says Ross McNulty, development director of Ediston Real Estate, where he is responsible for sourcing new development opportunities.

Pointing to three significant schemes in the city – Qmile’s Haymarket project, the £1bn mixed-use Edinburgh St James development being brought forward by Nuveen and Ediston’s own New Town North – McNulty says: “They all have a different feel to them. Those are the three major schemes which are on large-scale sites, which are going to take a period of time to come to fruition. But they’re all very different. And that allows for growth for each of us, and I hope they can independently flourish with such limited supply.”

Prelet opportunities

This lack of stock – and the delivery of refurbished grade-B stock – may be pushing up grade-A prices, but that’s not deterring occupiers.

“I think a lot of occupiers are now beginning to look a lot further forward,” says Curran. “Historically, people have been much more willing to wait for a building to be finished and let the building at that point. Now we are finding a lot more occupiers are looking at a much earlier point in the cycle – preconstruction, so we are looking at proper preletting opportunities.”

Curran continues: “That’s good from everyone’s point of view, but it just puts more and more pressure on that lack of pipeline coming forward. So it definitely creates a lot of opportunity. The other issue in Edinburgh is where there is a lot of grade-B stock that’s disappeared as well. That grade-B stock that’s now been refurbished is competing with the grade-A stock. There’s only one place that grade-A rents can go, and that’s up, because there has been so much pressure on them in the past.”

So will the pipeline grow? Mike Irwin, Savills’ director of office agency in Edinburgh, pauses before answering. “I think there will always be a limit on it just in terms of available sites and development opportunities within Edinburgh,” he says.

“Look at average take-up across Edinburgh city centre for grade-A offices versus the supply pipeline. The supply pipeline is not sufficient to meet typical annual take-up that we have seen over the past two, three, four or five years and beyond. In terms of negotiation, it does leave developers or owners of the right type of stock in quite a strong position.”

This will benefit landlords, but only in the short term. “The supply-demand imbalance is a concern, I think, to Edinburgh as a city, because a city needs a sufficient supply to facilitate its occupiers – to grow, to flourish and to attract new businesses into the city centre. So it’s a good thing if you have sites and rental growth coming through and good for investors.”

But is it a good thing for the city itself? Not necessarily, says Irwin: “A city has to be able to facilitate its own growth moving forward.”