Despite a fall in demand during the final quarter of the year, office take-up in Cardiff bounced back in 2022 with annual transactions above the pre Covid trend level, according to global property consultancy Knight Frank.
In its annual survey of the office market in the UK’s key regional cities, the firm reported that Cardiff office transactions for the year reached 459,074 sq ft, 87 per cent up from the previous year and the highest level in five years. The number of out-of-city deals grew by 20 per cent from the previous year.
Key office deals in Cardiff during 2022 included the 65,000 sq ft letting at Number 3 Capital Quarter to British Telecom at an annual rent of £23 per sq ft, the 1 Central Square 12,187 sq ft letting to Hodge Bank at £25 per sq ft, and the 14,751 sq ft deal at 1 Capital Quarter with The Audit Office at a £19.50 per sq ft rental.
More than 50 per cent of the year’s take-up was for grade A space, highlighting the continued occupier shift towards higher quality offices with strong amenity offerings and a sharpened focus on ESG credentials.
Matt Phillips, head of the Cardiff office of Knight Frank, said: “Both occupiers and investors have become far more discerning, with buildings that demonstrate the highest ESG credentials top of the agenda.
“We are seeing occupiers favouring Grade A buildings which have strong ESG credentials and we are seeing a growing polarisation in demand and rents achieved in those buildings that have made this investment compared to older, more dated stock. The success at Legal & General’s Hodge House building is a good example of this.
“While this focus on ESG to further dictate specification will increase the build cost for subsequent new developments, occupiers will be willing to pay this premium to secure the best space.”
As a result, Knight Frank forecasts prime rents in Cardiff city centre will increase from a headline rent of £25 per sq ft in 2021 and 2022 to more than £30 per sq ft in 2023.
It also expects to see more flexible and serviced office providers enter Cardiff to cater for the greater demand for flexibility and accommodate fast-growth companies.
The pipeline of new office supply tightened to 114,000 sq ft, with future Grade A office space currently limited to JR Smart’s John Street development which is scheduled for delivery in 2024, and Rightacres’ 100,000 sq ft office development at Central Quay, due to start on site in mid 2023.
An increase in the number of office stock sales from vendors who prefer, or are required, to exit rather than refinance is likely, Knight Frank believes.
In the office investment market, investment activity was challenged by political and macroeconomic volatility and the rising cost of debt.
Although deal numbers in 2022 were the same as the previous year, a shortage of higher value stock sales restricted investment volumes to £26 million, down 63 per cent on the previous year. Prime yields in 2022 were 6.25 per cent and are expected to reach 6 per cent in 2023, with yields set to continue to widen between prime and secondary stock that requires significant expenditure.
Commenting on the office investment market, Knight Frank Partner Gareth Lloyd said: ““We expect volumes to increase significantly in 2023 on the back of a more settled economic backdrop and a positive occupational market with demand focusing on best in class offices with strong ESG credentials or assets that can be repositioned to fit this profile.”
Matt Phillips commented: “During a year of continued uncertainty, the end of year data shows that the Cardiff office market has remained resilient. Despite macroeconomic uncertainty, occupier demand for well-located offices with good ESG ratings and amenities to support post-pandemic workplace strategies, has led to strong interest with further growth expected in 2023 because of a supply and demand imbalance.
“We have a large public sector in Cardiff and it is important moving forward to understand what the approach from both Welsh Government and Cardiff Council will be to office-based working. To date, the model has largely been centred on home working and it will be interesting to see what the policy is moving forward.
“Most occupiers have adopted a hybrid approach based on a strategy of building a team culture, education and better collaboration with colleagues. The quality of the office space is key to supporting this.”