The falling availability of Grade A supply is now a key theme across the country’s regional markets. It has more than halved from its peak in 2009, says the report from property firm Savills.
With an increase in larger lettings over the second half of 2013, the major regional office markets saw a 32% growth in take up in 2013 in comparison to 2012, the best year since 2007.
Cities which performed particularly strongly were Leeds with 97% growth, Cambridge with growth of 88% and Glasgow with 87% growth. Cities to watch in 2014 include Cardiff with an exceptional 107% increase expected. Manchester and Birmingham, although more modest, are still predicted to see a 26% and 14% rise in take up respectively.
Take up for the first quarter of 2014 is estimated to be 4% up on the same quarter in 2013, with particularly strong cities being Cardiff with 210% growth and Manchester with a 48% growth.
The report suggests that there is also evidence that the regional markets will increasingly benefit from relocations out of London to more affordable locations. An example is Deutsche Bank's 1,000 jobs in Birmingham as part of plans to decentralise some of their back and front office functions.
Currently, Birmingham's top rents are still 14% down from their peak of 2008, compared to the City of London where rents have already beaten their peak by 17%. Many regional cities are at a point in the cycle where it has the capability to become the 'value for money' alternative to London.
According to Jonothan Holmes, Savills director of investment, regional city vacancies are falling, and the development pipeline is only equivalent to 0.8% of stock. As a result regional office locations are now starting to respond to the changing market demands and are at varying stages of seeking to attract office development back in the city centres.
He believes that the take up and supply balance looks attractive in key locations such as Manchester, Leeds, Birmingham and Edinburgh, however, office rents need to grow in many Tier 2 locations to make development viable without public sector pump priming.
‘Given the renewed demand in the regions, against the improving economic conditions, there are great opportunities ahead for those investors and developers with well located sites. Indeed, the growing confidence in regional office markets, with growing demand and limited supply, is a catalyst for developers to act sooner rather than later,’ he explained.
‘Despite an economically challenging few years, we are of the belief that the regional markets are now at a turning point, with the regions being well placed to take advantage of the improving occupational markets, with some locations faring better than others,’ said Holmes.
‘The sustained levels of occupier demand combined with the decreasing availability of grade A office supply has also been a catalyst for rental growth in the majority of regional office markets. As we go through 2014, as the economic recovery really starts to take shape and new developments provide a step change in rents, we expect rental growth for prime space will continue on an upward curve in the majority of the regional cities,’ he added.
Seven of the UK cities covered are expected to see growth in 2014. Savills predicts a notable rise moving forward in Manchester and Edinburgh where rents are likely to see a 7% increase going form £30 per square foot to £32 per square foot. Cambridge and the M25 are close behind at 6%, moving from £34 per square foot to £36 per square foot and £41 per square foot to £43.50 per square foot respectively, over 2014.
Away from the prime end of the market, Savills expects rental growth to remain subdued with high levels of second-hand space still on the market.
