Cardiff office take-up increases 33% above 5 yr average

Chris Terry, Associate Director in DTZ’s Office agency team in Cardiff.

A surge in pre-letting has driven annual take-up of regional office space to the highest level on record, according to research from DTZ.

With occupiers increasingly active in H1 2015, the annual take-up volume outside London was 5.9 million sq ft – 35% above the long-run average. A sharp increase in pre-letting activity in the regional markets resulted in take-up of 1.2 million sq ft of Grade A space in H1 2015, 35% more than the same period a year ago.

In Cardiff, occupier sentiment remained strong and take-up volumes increased significantly to 108,000 sq ft in Q2, 33% above the five year average. With limited available space, particularly grade A, occupiers chose to expand their existing premises rather than to relocate completely, which was the main driver behind the Q2 increased take-up volumes.

Chris Terry, Associate Director in DTZ’s Office agency team in Cardiff commented: “There has been an encouraging level of occupier activity so far this year. The first two quarters of 2015 have witnessed increased activity when compared to the same period in 2014, and there remains a number of unsatisfied sizeable Cardiff city centre requirements looking not only at new grade A speculative office development at One Central Square, but also quality refurbished city centre accommodation.

He continued: “Rents are coming under pressure as the existing supply of good quality stock diminishes and we anticipate a rise in office rents for quality refurbished city centre stock, and prime Grade A rents to exceed £24 psf over the coming months”.

Andrew Gibson, Director, Investment agency at DTZ in Cardiff added: “We have seen significant investor interest in Wales over the first half of the year, with continued confidence in the occupier market driving pricing. Despite this interest, office investment volume in Wales has come in under expectations so far this year. We therefore anticipate that this will increase in the second half of 2015.”

Alex Dunn, Senior UK Analyst at DTZ, said: “The surge in pre-letting activity has been enabled by an enlarged development pipeline following years of developer inactivity. Eight million sq ft of speculative space is due to be completed by 2019 – an enormous 138% increase in development compared to the last four years. Nonetheless, it is still 15% below the average pre-Crisis rate of delivery, which suggests developers are still acting relatively cautiously.”

Take-up is absorbing standing stock as well as yet-to-be-completed schemes and, with seven consecutive quarters of above average lettings activity, availability has continued to fall across all grades. Grade A availability has become critical in some regions, notably Leeds which has less than five months of Grade A supply left at prevailing take-up rates.

Ben Clarke, Head of UK Research at DTZ, said: “The short-term supply squeeze means many incumbent occupiers needing space immediately are leasing additional space elsewhere, rather than vacating and taking one larger premises. This is because availability is fragmented and larger chunks of space are currently very limited. The balance of power has definitely shifted towards landlords. We are seeing this translated into rent increases and also in less favourable lease terms. These include reduced rent free incentives, which have fallen by 12% since the beginning of the year to an average of 18 months on a 10 year commitment.”

Prime rents are forecast to rise by an average of 11% by 2019 as new, higher-quality projects come to market and competition intensifies over suitable available space. Rents in Birmingham and Manchester are expected to increase the most, by 14% each to £32.50 per sq ft and £36.50 respectively.

Ben Clarke added: “We continue to see strong investor interest in the UK regions, with a total transaction volume of £930m so far this year. This has been underpinned by the improvement in underlying occupier markets and the yield differential with London. Prime regional office yields moved in a further 36 basis points to 5.3% in the first half of 2015.”