Rising costs threaten regional office schemes

A rush of office lettings over the final months of 2022 gave a lift to the full-year figure for the biggest regional cities – but optimism could be short-lived as economic worries mean many development projects are on hold. Data from Cushman & Wakefield, shared exclusively with EG, showed take-up of almost 1.3m sq ft across the ‘big six’ cities of Birmingham (pictured), Bristol, Edinburgh, Glasgow, Leeds and Manchester in the final three months of 2022 – 17% above the 10-year average for the fourth quarter.  That put the full-year figure across the six cities at just over 4m sq ft, which was a 4% year-on-year lift, albeit notably below the 10-year average. Cushman & Wakefield associate director in UK research and insight Kiran Patel said: “Bristol was the only market which saw an increase on the 10-year average, which speaks to the shaky start to the year in some markets. “This picked up in Q4, particularly in Birmingham and Manchester, but most markets were down 1-7% on the 10-year average, apart from Glasgow which was considerably down and closer to 40%.” Landmark deals in the final quarter of the year included BlackRock taking 139,000 sq ft at 20 Brandon Street, Edinburgh; Deloitte taking 63,000 sq ft at 100 Embankment in Manchester; and Global Banking School taking 43,800 sq ft at Birmingham’s Norfolk House. Cushman & Wakefield head of national office leasing for the UK Charles Dady said: “By the end of last year, we found occupiers saying ‘Well, do we pause for thought? Or do we do what we know we should be doing, which is providing our staff with a better-quality work environment to get them back into the office?” The greatest challenge now, Cushman said, will be the constrained development pipeline. Of 2.1m sq ft of speculative development across five of the six cities – excluding Edinburgh, where there is no speculative development – Cushman said the majority has been paused in recent months due to rising build costs, inflation and the increasing cost of debt. This will have a direct impact on supply and rental growth in the coming months, the agency said. Supply of quality office stock in the regions is already falling. In the fourth quarter the availability rate in the ‘big six’ stood at 8.2%. This equates to 7.52m sq ft, a 5% quarterly decease. Most of the available stock is older offices with poor ESG credentials. Around three quarters of available space is secondary stock, with tenants racing instead to secure higher-quality offices that help them support staff wellbeing and their sustainability goals. Take-up of grade-A stock was 4% above its 10-year average, and the gap between the best and the rest continued to widen as secondary take-up clocked in 18% below its 10-year average. Large-scale transactions fell in 2022 compared to previous years. Larger spaces proved significantly less popular, with deals in excess of 50,000 sq ft accounting for only 11% of ‘big six’ take-up, below the 27% five-year average. The lack of grade-A supply and absence of speculative development has created “a very different backdrop to previous downturns” according to Dady, which is bolstering headline rents and “encouraging occupiers to secure the best space while it’s still available”. But weakened economic confidence and “the pressure for occupiers to control or reduce their cost base is challenging those push factors”, added Dady. He said: “We are therefore expecting the markets to be quieter in H1 2023 with activity stepping up again in the second half when confidence is expected to improve.”  See how Cushman & Wakefield and other agents compare in regional markets with our On-Demand Rankings>> To send feedback, e-mail chante.bohitige@eg.co.uk or tweet @bohitige or @EGPropertyNews