Experts at DTZ in Manchester review the 2013 commercial property market and look ahead to 2014.
MANCHESTER OFFICE MARKET
‘City centre take-up reaches a three year high’- Ken Bishop, Senior Director in DTZ’s Office agency team comments on the city’s office market:
“The office market is looking far more positive than was the case 12 months ago. Improvement in the national economy has created greater confidence amongst businesses and an increase in activity after the summer holidays has been particularly in evidence.
“Total take-up for 2013 will be the highest for three years and it is even possible that it will achieve the long-term average of 950,000 sq ft, even without the long-running saga that is the Project Tomorrow, a requirement where terms have been agreed for at least two years on approximately 200,000 sq ft for a number of buildings across the city.
“The year has seen a number of large requirements for existing buildings which has been the case for many years. Barclays Bank is committed to 80,000 sq ft at 4 Piccadilly Gardens; Trader Media Group have agreed to take 40,000 sq ft at No. 1 First Street and at the beginning of the year Travel Jigsaw signed a lease on 62,280 sq ft at Sunlight House. In addition, Australian lawyers, Slater & Gordon, are currently seeking 100,000 sq ft in the city centre.
“The four occupiers at Barbirolli Square (PWC; Addleshaw Latham; Ernst Young and DLA) are considering their position given their lease expires in the middle of 2017. Whilst all four occupiers may not relocate it would be surprising if none of them did. As a result, the first half of 2014 may see one or more sign a pre-letting.
“Developers are responding to the demand and improved market conditions. Mosley Street Ventures have announced their intention to commence the speculative construction of 162,000 sq ft at 2 St Peter’s Square and Allied London have made noises about starting The Cotton Building and 1 Spinningfields. With other developers gearing up to commence work it is likely that there will be three, if not four, new schemes under construction by the end of 2014.”
‘Caution is still the watchword as confidence slowly returns to’ – Tony O’Keefe, Director in DTZ’s Industrial agency team comments on the North West’s industrial market:
“The North West Industrial market has recorded a number of highlights through the course of the year.
“A brace of deals to accommodate over 1.5million sq ft of accommodation at Miller developments/HCA Omega Scheme in Warrington to Hermes Parcelent, Brake Brothers, Travis Perkins and ASDA set the tone for the year and was followed by other large deals to B&M, Home and Bargains in Liverpool. Retailers continue to dominate take-up in the logistics market where there has been a noticeable ‘land grab’ by occupiers which looks set to continue as they secure the little deliverable land left in the region.
“Omega shone in 2013, however, the baton of success is set to pass to Harworth Estates, Logistics North scheme in Bolton which is expected to emerge as the pre-eminent Industrial Park in the region.
“One of the most significant industrial developments in the north of England, the 110ha employment development will deliver up to 372,500 sqm (circa. 4 million sq ft) of industrial and storage/distribution space. Harworth has just secured a resolution to grant planning permission from Bolton, Wigan and Salford Councils for the scheme. Details of the first phase of development comprising a c. 450,000 sq ft regional distribution centre for Aldi have also been approved as well as the 225ha country park on land surrounding the employment site. Construction of the site infrastructure, the first phase of the development and the country park will commence in early 2014.
“Outside of the larger logistics market conditions remain challenging but there are reasons to be positive. As available quality accommodation dwindles occupiers will be faced with a supply shortage and developers are poised to respond to this demand. There has been little speculative development of note in the region although new schemes have been seen by Barnfield Construction and Chancerygate is to develop a new 80,000 sq ft scheme at S Park, Stockport. It is anticipated this will be a forerunner to further development across the region but these will only be seen on prime sites in tried and tested locations.
“We continue to experience the lowest availability levels of Grade A product in the UK, with less than six months of built supply, and during 2014 we expect to see improved take-up of secondary accommodation as occupier demand permeates through the quality strata and a return of speculative refurbishment of accommodation.
“Landlords will be in the ascendancy and we should expect this to be reflected in leasing terms, incentives and rents. However, whilst the North West is poised to respond to improved economic sentiment caution is still the watchword as confidence slowly returns.”
‘Another mixed year for the commercial property market’ – Russell Hefferan, Associate Director in DTZ’s Valuation team comments:
“2013 was another mixed year in the commercial property market, with prime property continuing to remain strong. We noted a marked improvement for secondary, although tertiary continues to struggle. Overall the market has improved over the last 12 months, investors and lenders are more confident and we are now seeing asset management initiatives being factored into investor pricing, particularly on secondary stock. Over the previous four years, voids were typically seen as a liability by landlords, however over the last 12 months as occupier demand has stabilised voids are now seen in a more positive light and as a way to improve the overall income profile of an investment. Out of the three main sectors of the commercial property market, the retail sector continues to have negative annual rental growth, although over recent months this has been trending upwards, driven by an improvement in shopping centres. The lack of speculative development in the industrial and office sectors has helped to maintain rental levels, and demand from tenants has resulted in incentive packages offered by landlords in the form of rent-free periods have generally reduced.
“Banks continue to take positive strides in dealing with their legacy loan books. We have also noted increased activity in the lending market with several of the main banks showing a greater appetite to lend in the region. Lenders are typically offering loan to value ratios for well-secured investments up to around 65% and the increased competition has helped to reduce banks margins and fees. The market has also seen a return to mezzanine finance. 100 Barbirolli Square, Manchester was purchased in September for £41.2m with lending from RBS which included a tranche of mezzanine debt.
“We expect to yield spreads to narrow from 2014, and secondary to continue to outperform prime. This is due to a sustained improvement expected in economic growth, and changes in the perception of secondary assets and investors’ level of risk aversion. If the economy continues to improve at the same pace there is the distinct possibility of interest rate hikes as soon as Q4 2014 with the expectation that rates will continue to move higher in 2015.”
‘Proactive delivery is likely to be a key theme in 2014’ – Caroline Baker, Director in Development Consulting at DTZ in Manchester comments on the year ahead for local authorities and the wider public sector in the North West:
“2013 has seen continuing positive signs of recovery, be it slower in the North than London and the South East. In particular, a definite shift has been seen in the housing market with increased activity in terms of both planning applications and development on the ground. However, 2013 has continued to be a difficult year for the public sector and local authorities in particular. More spending cuts are really starting to make inroads into their area’s activity and many local authorities are continuing to have to restructure and make further job cuts.
“Moving into 2014 we anticipate two key themes to dominate local authority activity – collaboration and proactive development.
“In terms of collaboration, we anticipate seeing various arrangements to support the delivery of local authority priorities. Merseyside authorities are currently consulting on the benefits of a combined authority with the aspiration of achieving similar success to that of the Greater Manchester authorities. There are also likely to be more informal collaborations with neighbouring authorities, or those tackling similar issues, working together to achieve economies of scale and sharing best practice.
“This trend is also likely to expand to other public sector partners as all respond to reduced budgets. Collaboration in respect of the rationalisation of estates and more efficient delivery of services will be a priority. Opportunities exist for developers and investors to offer their technical expertise to support the public sector achieve their objectives.
“Proactive delivery is likely to be a key theme in 2014. Local authorities need to consider the range of tools that they have available to them to achieve their objectives in the short term. For example the use of public land to accommodate the delivery of new homes, potentially on a deferred payment basis, particularly in regeneration areas. There are likely to be further examples of direct development where local authorities are cutting out the development middleman and directly contracting development themselves to deliver priority projects.
“There are also signs of more proactive behaviours in the wider public sector as organisations, including the NHS, police, universities and colleges, come under pressure to change and to find property solutions which support these changes. For some, notably, the NHS, the challenge of change is considerable. Clear strategies need to be put in place if a change is going to deliver the positive results required.
“We also expect to see Local Enterprise Partnerships (LEPs) playing an enhanced role as they are finally being provided with access to funding sources which will enable them to have a greater direct influence on economic development in the sub-region.
“However, with economic growth remaining relatively modest by historical standards, and parts of the region seeing little real growth, we expect the government to become more proactive in its interventions – especially in areas such as housing – and there were some signs of this in the Autumn Statement.”
‘The time to act is now, both for investors and occupiers’ – Gino D’Anna, Director of DTZ’s Professional Advisory Services team, on the situation for corporate occupiers in the North West in 2013 and into 2014:
“Throughout 2013 conditions remained difficult with tenants remaining focused on cost reduction and estate rationalisation. However, as we predicted this time last year, as supply in prime markets is contracting, opportunities to renegotiate leases to secure favourable lease terms or financial incentives are becoming more difficult.
“Investors and landlords are increasingly confidants in letting Grade A premises. Financial incentives remain available, however, in prime markets such as Grade A offices in Manchester City Centre and locations within the industrial/logistics market headline rents are once again slowly recovering and incentives beginning to harden.
“The North West and in particular Manchester remains attractive to both inward and foreign investors. We expect investors to focus to shift from prime to secondary opportunities. At the same time, there remains an overhang of lower quality Grade B stock. Here the trickle-down effect from Grade A markets is having a slower effect on supply, values etc. This area of the market is appealing to investors looking for asset management opportunities and in turn still leaving occupiers able to rebase costs through extending lease commitments.
“However, more than ever, the time to act is now, both for investors and occupiers to be bold as per our Outlook 2014/research event and take advantage of improving economic and market conditions.”