Poor quality secondary office floorspace accounts for 70% of total UK stock

Poor quality secondary office floorspace accounts for almost 70% (721m sq ft) of total UK office stock, according to new research by DTZ . This report considers quality of office space, defined in terms of grade A (prime), B (good quality secondary) and C (poor quality secondary). It reveals significant variations in the proportion of grade C space across the UK office market.

The highest proportion of grade C stock is in the minor UK markets (85%) where low development activity has resulted in only a small amount of modern stock. London outside the City & Fringes also has a high proportion (68%) due to low development activity in most locations except the West End and west London.  In central London, where the value of land has justified a more intense level of development and superior build quality, grade C space accounts for more than half of all stock (54%). Grade C space in most markets exceeds the total amount of grade A and B space.

Grades A and B account for around 9% and 22% of UK stock respectively. Outside the main office markets the figures drop to less than 4% for grade A and 11% for grade B.

Martin Davis, Head of UK Research at DTZ added: “Our analysis suggests that over two-thirds of the UK’s office stock can be classified as poor quality secondary. This is based on a bottom up assessment of nearly 3,000 buildings covering 164m sq ft in Birmingham, London City & fringes and Reading as representative markets for the UK as a whole. This analysis was further extended to the rest of the UK by using a variety of sources and by assuming a certain relationship between quality and age of office buildings in these other markets”.

The research highlights that, contrary to popular belief, availability of grade C office space is lower than grades A and B. Despite doubling in regional markets since 2008, the proportion of grade C space that is available across major UK markets is estimated to be only 3.5%, compared to 12% for grade B and 19% for grade A.

However, DTZ expects that grade C availability will increase further in regional locations in the coming years. Grade A and B landlords are offering significant incentives to encourage grade C tenants to move on low cost or cost-neutral upgrades. This trend has already been observed in the big nine regional UK markets, as tenants have upgraded from grade B to A.

“Contrary to our expectations grade C has a lower availability rate than grade A and B stock. Nevertheless, we expect this position to deteriorate in the face of continued low economic growth and competition for occupiers from better quality space”, Martin Davis added.

Rob Yates, Director, Office Agency at DTZ in Manchester, comments: “Grade A accommodation in Manchester currently accounts for only 20% of total availability and supply has reduced sharply, absorbing the record development pipeline delivered between 2007 and 2010. Grade A availability currently stands at around 677,000 sq ft. On average 400,000 sq ft of grade A accommodation is let in any given year and in this context there is around 1.7 years of standing supply.

“Well located secondary offices should fare well in 2012, including buildings such as Sunlight House, Spinningfields which provides large refurbished floor plates in a central location. In total 50,000 sq ft is available at the property, with floors from 15,000 sq ft. Also, there will continue to be opportunities for budget led requirements with some buildings in peripheral locations, available on flexible lease terms at extremely competitive, all inclusive rents.

“Over the past 12 months, we have also witnessed a number of older, obsolete buildings being earmarked for redevelopment, Elisabeth House, Brazennose and London Scottish House all being prime examples. It is unlikely however that any newly completed stock will be available until 2013 at the earliest.”

One solution to address obsolete grade C space is redevelopment. However, DTZ’s research shows that this is more likely in London City than in regional markets. In the City, 14% of grade C stock is subject to some kind of development interest, with few non-office sites available for redevelopment. In regional markets, developers have more options for redeveloping non-office sites, and consequently not much grade C office floorspace is likely to be recycled.

Alternative use is a possibility, particularly in London. Over the last decade 5.4m sq ft of office space has been redeveloped in London with change of use to residential (3.5m sq ft), hotels (1.5m sq ft) and student accommodation (0.4m sq ft).

Martin Davis adds: “Beyond London the prospects for alternative uses are less easy to implement, certainly for residential development while the market is weak. This creates a problem for grade C owners in terms of recycling unwanted stock – especially since grade C availability is likely to be higher in less developed markets outside of London.”