Quality office supply at lowest level for over a decade – LSH

Peter Musgrove, Head of Office Agency South West, Lambert Smith Hampton

The supply of good quality office space across the South West and South Wales is at its lowest level for more than 10 years, according to new research published by leading commercial property consultancy Lambert Smith Hampton (LSH).

LSH’s second annual South West and South Wales Office Market Report, which provides investors, developers and occupiers with a detailed insight across the region, reveals that total office availability has nudged down to below 5m sq ft, its lowest level since 2005. The report covers twelve key market locations including Bristol, Bath, Swindon and Cardiff.

The report points out that the extension of Permitted Development Rights (PDR) has continued to add pressure to the supply of high quality office space, with almost 2m sq ft of stock – equivalent to 16 per cent of all built space – being lost to residential development in Bristol alone. Total availability in the city fell by 20 per cent in the first half of 2017, standing at 677,000 sq ft, equivalent to a little over one year of supply.

Elsewhere, the report points to a chronic lack of grade A space across the region, with Exeter and Bath offering no grade A stock at all.

While the twelve South West and South Wales markets collectively saw a robust level of take-up activity in the first half of 2017, at 1.02m sq ft, there were fewer sizeable transactions than usual, reflecting the lack of supply suited to larger occupiers. Between January and the end of June this year, there were just three deals in excess of 30,000 sq ft, one in Bristol and two in Cardiff; in contrast, 2016 saw 11 larger size deals, of which seven were over 50,000 sq ft.

Peter Musgrove, Head of Office Agency South West, said: “There is little doubt that the lack of quality office stock in the South West is having an impact on the commercial property market, with upward pressure on rents and reduced opportunities for occupiers to negotiate incentives.”

“For now, we are seeing more businesses exploring alternatives to moving, such as renewing existing leases, taking expansion space in an existing building or leasing satellite offices. But this isn’t sustainable long term.”

“Uncertainty over Brexit and rising construction costs have led to caution amongst developers. But with robust demand from both the occupational and investor markets, we can see that the fundamentals to support development are in place.”

Supply pressures are pushing up rental values, the report states, with certain key markets including Bristol City Centre, Bristol out of town, Exeter and Newport all forecast to see double-digit rental growth between now and the end of 2018.

A lack of space is also creating strong market conditions for refurbishments, the report says, with refurb schemes in Cheltenham, Swindon and Plymouth helping to alleviate demand.  “Tight supply bodes well for asset repositioning and we’ve seen tangible evidence of rental growth for good quality second hand space in the past 12 months,” says Peter.

“There are viable opportunities for market-aware investors to meet strong local demand with refurbished premises in key locations across the region.”

Looking ahead to next year, the report suggests there will be an upturn in the larger end of the market following a quiet 2017, with nearly 120 lease expiries and breaks above 5,000 sq ft across the region’s 12 markets, amounting to just over 1.5m sq ft of potential demand.

“Although a significant proportion of lease events will not result in a relocation, it will be an essential trigger of demand, particularly for occupiers of poor quality space,” says Peter.

“The risk is that without the appropriate supply in place, occupiers will have little choice but to stay in situ, even if there is a desire to upgrade or expand into alternative building. ”

Investors looking beyond Bristol and Cardiff

While Bristol and Cardiff remain the focus of investors looking at the region, the report points out that office volume across South Wales and the South West combined is on track to hit a record high for a single half year period, with £250m of office assets changing hands by July this year – a level well in excess of total volume for the entire period in H1 2017.

Bath is firmly in favour with investors and the city saw a number of key deals in the first half of this year, the largest being CBREGi’s £8.6m purchase of Royal Mead. Elsewhere, Cheltenham was home to three of the South West’s largest deals in H1 2017, including Mayfair’s PITCH £14.8m purchase of Jessop House, while Exeter saw one of its largest ever investment deals in May this year, with Schroders acquiring The Senate for £15.7m.