A widening supply gap across the UK’s Big 6 regional office markets is set to support further rental growth and encourage refurbishment, pre-lets and innovative solutions to fund new development according to JLL’s latest “Arrested Development” report.
With a number of long standing issues holding back speculative development, most notably the limited availability and high cost of debt finance, the current shortage of Grade A space in the regional markets looks set to continue.
Across the Big 6 cities, only 693,000 sq ft of offices is due to complete in 2018 with a further 933,000 sq ft anticipated in 2019. This falls well short of the level of demand for new office space, with average Grade A take-up across the Big 6 of 1.8 million sq ft. Furthermore, the tendency for new space to be pre-let ahead of completion means that the market will continue to see very tight supply for the foreseeable future.
Ben Burston, head of UK Offices Research at JLL said: “Competition from other uses and rising construction costs are holding back speculative office development in the UK regions, on top of the high cost and limited availability of debt. The regional office market is still adjusting to the seismic change in credit markets post financial crisis and the resulting lack of development supports rental growth and is encouraging occupiers to take pre-lets.”
JLL’s report shows that the supply demand imbalance for good quality space has seen prime headline rents across the Big 6 markets increasing by 5% on average over the past two years. JLL forecasts an average increase of 2.2% over 2017-21.
Reflecting rising costs and limited appetite for risk, refurbishment of existing office space has become more prevalent. Major refurbishments now account for a greater share of office development, rising from 16% in 2007 to 72% in 2017.
Ben continued: “Whilst tight supply can be viewed as a positive, in that it reflects strong occupier demand, if the lack of speculative office development in our major regional cities persists it could hinder the pace of economic growth and inward investment. Regional cities need funders and developers to work together to provide innovative solutions to alleviate these challenges.”
JLL points to Local Authorities, who have emerged as a key driver of speculative development in a number of cities including Manchester, Birmingham and Leeds, as their support is not entirely dependent on a scheme’s financial viability but rather the importance of the development to drive regeneration, create employment and produce downstream revenues from business rates.
Angus Minford, director, UK Capital Markets at JLL, added: “Local Authorities have been increasingly active as purchasers of commercial property over the past year, although with future investment potentially restricted to their own geographical areas, the opportunity for authorities to become key drivers of office development within their towns and cities is likely to rise.”
Angus concluded: “Infrastructure projects, such as the Edinburgh-Glasgow Improvement Programme, Great Western Mainline Electrification and HS2 projects, along with associated improvements in connectivity have the potential to trigger office development. We expect several major projects to help bring new office schemes forward in coming years tied to wider urban regeneration strategies.”