The latest regional prime office report from CBRE which forecasts the market for the next five years, says that a growth in office based jobs in many parts of the country has yet to manifest itself in any substantial rental growth in any of the major regional cities, except Manchester.
Manchester is set to be the star of 2013 with Leeds also expected to do well and growth also expected in Birmingham. But Bristol and Southampton are likely to see much growth and in Scotland while Edinburgh is set for rental growth this year, Glasgow is likely to catch up in 2014.
‘We expect Manchester to be the only one of the eight regional markets covered to record prime office rental growth in 2012. In fact rental growth is expected in every year of our forecast period. Manchester has outperformed the other markets since the downturn and is expected to do so again in 2013, which is reflection of its more positive employment outlook, says the report.
‘Beyond 2013 rents are supported by employment growth across a number of industries; information and communication, real estate, administrative and support services and professional, scientific and technical activities,’ it adds.
In Leeds the outlook is similar, with marginal rental growth early in the period gaining some momentum in the later years. Here employment growth isn’t expected to be as strong as in Manchester and there are currently no major schemes in the pipeline likely to deliver any significant new space.
Elsewhere in the northern region, Liverpool’s forecast is slightly more subdued. ‘Although we expect the size of the office based workforce to increase from 2014, it will not be at the same pace as some of the other cities,’ says the report.
In Birmingham the story is slightly different. ‘After seeing marginal growth in 2013, we expect rents to be flat in 2014 as a consequence of new space coming to market during the previous year. Later in the period demand for office space is driven by job creation primarily in two sectors; administrative and support services and professional, scientific and technical activities,’ it adds.
Moving further south, the report says that the market in Bristol has struggled to build any momentum and so it is quite possible that rents will slip very slightly in 2013. ‘Against this backdrop it is unsurprising that there is no new supply of note coming though in the next few years. This lack of new supply combined with a robust employment outlook leads to rental
growth in 2014, 2015 and 2016 outperforming all of the other markets,’ the report explains.
Southampton isn’t expected to see rents fall in 2013 but apart from this the outlook is very similar to Bristol, with employment growth gaining momentum through the period and no new supply in the pipeline.
In Scotland, rents are expected to increase in Edinburgh in 2013 aided by the Atria development, which is currently being marketed and will potentially secure deals at headline rents of £28 or £29 per square foot. With no such building to change the rental tone in Glasgow, rents are set to stay unchanged. From 2014 onwards both Scottish cities are forecast to record gradual rental growth, Glasgow slightly outpacing Edinburgh thanks to stronger employment forecasts.
The downside risks to the outlook come mainly from overseas, in particular from a renewed escalation of the Eurozone crisis or from the unresolved matters linked to the US fiscal cliff.
But the report says there are upsides too. At a national level, increased employment and job security may reinforce the embryonic consumer recovery which would boost underlying economic growth.
At a regional level, high occupier costs in London may start to push some occupiers towards the regions, it says, adding that future office demand will be primarily driven by private sector growth as austerity measures over the next few years is likely to stunt public sector growth for the next decade.
There are also some indications that the regions will benefit from some transfer of jobs out of London to more affordable locations around the country.
‘We also expect growth to be focused on specific sectors. Underlying growth within financial services employment is likely to remain slow, particularly in the short term. Across the eight cities in these forecasts growth is forecast to be just 1% over five years,’ the report says.
‘In contrast, and perhaps the area of particular interest in the upturn, is the information and communications sector. Over recent years there has been a marked shift in the types and locations of office space that companies in this sector have been considering. This has coincided with a change in the types of businesses dominating the sector. Growth over the last 20 years has been from multi national hardware and software developers, particularly those who support the commercial market,’ it explains.
‘However, there is now a shift taking place due to the growth in mobile devices such as smart phones and tablets, and with them an increase in social networking. This means increased focus on design, content and creativity and a blurring of the boundaries between IT, telecoms and traditional media,’ it adds.
The trend can also be seen in other major cities and across the eight cities the sector is forecast to expand by 6.5% over five years. Also growth in business administration and support services as well as professional, scientific and technical services are expected to see stronger growth both proportionally and in terms of head count.
‘For business administration and support services, with the exception of some isolated locations, this sector has been more resilient during the downturn and was one of the key drivers of growth pre-downturn. Across the eight cities, growth is forecast to be 12.8% over five years, with cities including Leeds, Glasgow and Manchester forecast to see the fastest growth in this sector,’ it adds.
For professional, scientific and technical services employment collective growth across all eight cities of 14% is expected over five years. Manchester, Leeds, Glasgow and Bristol are expected to see the strongest growth from this sector, and some of this growth is likely to be as a result of so-called near shoring.
The public sector is named as the only office occupying sector that will continue to decline in
numbers over the coming years and beyond 2017, the report also says. Across the eight cities this amounts to a 12% decline, or just under 23,000 jobs over five years.
