Buzzing Birmingham faces looming office shortage
Birmingham is undergoing something of a boom, but grade-A office space in the city could reach an all-time low by 2017.
There is a palpable sense of excitement in Birmingham at the moment. A quick tour of the city centre reveals why. In addition to the recent bolstering of the second city’s retail offering thanks to the new outpost of Harvey Nichols in the Mailbox and one of the largest John Lewis stores outside London opening its doors this month, work is proceeding at a breakneck pace on the new concourse at Birmingham New Street station - not to mention the opening of a new runway at Birmingham International, which allows travellers to fly direct to China and America’s West Coast. Then there’s the proliferation of construction cranes towering above the city as developers forge ahead with long-promised projects. City-centre agents say Birmingham has never felt so vibrant. But is trouble looming in the distance?
According to data from Savills, by 2017 grade-A office space in the city centre will have reached an all-time low if current active requirements are absorbed by existing stock, which limits opportunities not just for potential inward investors but also local companies. If this eventuality comes to pass, what is the fallout likely to be and what mitigation measures can be put in place to limit the potential damage?
Birmingham’s impending shortage of grade-A office space is partly due to record high levels of take-up in the second quarter of 2015. Just over 500,000 sq ft of space was gobbled up in Q2, surpassing the previous high recorded in Q2 2002, according to figures from CBRE. In the first half of 2015, 623,422 sq ft was acquired by occupiers - 89% of total take-up in 2014 - with the figures boosted by HSBC pre-letting 212,000 sq ft at 2 Arena Central for its new retail banking division’s HQ. As a result, there is currently around 215,000 sq ft of grade-A space, according to Colliers, which will reach an all-time low mark in two years’ time.
“Our stance wasn’t to say that we have a real issue with supply as I don’t believe that we have, but if you look at availability through 2015-17 - assuming there is a steady take-up of grade A and some of the larger requirements in the market happen - then we get to a stage in 2017 where we will be at an all-time low,” says Nick Williams, director in the office agency at Savills. “We’re not saying the lack of stock will start to kill the market and we will lose enquiries. The market dynamics are very strong and we think there is an opportunity to take rents back to where they were in 2008 and beyond.”
While Savills thinks the issue of a lack of grade-A availability won’t rear its head for a couple of years, George Jennings, an associate at Bilfinger GVA, believes that the tipping point might be reached sooner than that.
“If you look back to 2007-08 there was about 1.2m sq ft of new office space that was doing nothing - it was just sitting there in the sun,” says Jennings. “Over the last seven or so years, we’ve got that 1.2m sq ft down to about 170,000 sq ft, so I think that the shortage will come sooner than 2017 and that in 2016 there won’t be any new grade-A stock available in the city centre.”
That is because 2015 is projected to be an exceptionally strong year for the Birmingham office market. In addition to a sizeable requirement from PricewaterhouseCoopers, Irwin Mitchell is understood to be in the market for 50,000 sq ft-60,000 sq ft, and there are at least a handful of other chunky requirements for office space in the city centre, with a further 1.2m sq ft of lease events anticipated over the course of the next 24 months.
“There are probably more requirements in excess of 50,000 sq ft than I can remember in my professional career,” says Ashley Hancox, executive director of the Birmingham office agency at CBRE. “There’s a lot of excitement and interest in the Midlands at the moment and inevitably some of those occupiers who are looking at the UK as a whole will land in Birmingham.”
While there is not a great deal of space for office occupiers to choose from at the moment, there are plenty of possible options in the development pipeline in the medium term, according to Hancox.
“There is land and there are schemes that are deliverable,” he says. “Paradise is an extension of the existing CBD, with Argent, Hermes and Birmingham City Council on site with 340,000 sq ft that will be delivered in 2018.
And there are a couple of other schemes that are deliverable from a planning perspective, such as Ballymore’s Three Snowhill, which will deliver 360,000 sq ft of offices, although they have yet to put a spade in the ground.”
In terms of schemes deliverable in the shorter term, Brockton Capital will complete 50,000 sq ft of office space on a single floor in the Mailbox by the end of the year, and Goodman is already on site at Eastside Locks on a scheme that will eventually deliver 750,000 sq ft of new office space.
“We have fully committed our first phase of office development, which was started speculatively in November last year, and we are in the process of delivering up to 70% of the site-wide infrastructure alongside this,” says James Raven, Development Director UK Business Parks at Goodman.
As these examples show, developers are much more inclined to bring forward spec developments at the moment than they have been for a number of years, says Alex Tross, head of office agency, Birmingham, at Lambert Smith Hampton.
“There is an appetite, belief and confidence that product will be taken up at scale from occupiers coming from the South East or even abroad now,” says Tross. “Historically, Birmingham has been an indigenous churn market and there probably isn’t enough local demand to drive the speculative development cycle, but off the back of deals to Deutsche Bank, HSBC and HS2, plus other banks rumoured to be circling the market, there’s a real confidence that rents and demand are there, which will enable these developments to stack up.”
Until recently, the prospect of spec development has been hindered by the lack of rental growth. Prime rents are currently circa £30/sq ft. However, they are expected to move on from this level soon and rapidly, believes David Smeeton, head of Colliers’ Birmingham office.
“Are they going to hit £35/sq ft?” he asks. “It wouldn’t surprise me. Does that mean occupiers are going to get a bit of a shock? Yes. People are talking about £32.50-£33/sq ft as the likely new headline rent, but you wonder if it’s going to go higher than that. Construction costs are moving at 5% per annum compound and that has to have an impact.”
The sure sign that rents are going to increase is when incentives start to come in, and that’s already started to occur, says Jonathan Carmalt, office agency director at JLL. “The days of two years for five and three years for 10 have gone,” he adds. As a result, it has gone from a tenant market to a landlord market more quickly than anyone anticipated, says Jamie Phillips, partner in the office team at Knight Frank.
“For landlords it’s great because there is less competition, but as an occupier you’ve got very hard and aggressive deals coming back from landlords, with occupiers losing flexibility in the deals that they can sign,” he explains.
The other noticeable shift in the market has seen quoting rents consistently achieved. “Whereas before if you were quoting £20/sq ft you might get £18/sq ft, now if you’re quoting £20/sq ft you get £20/sq ft,” says Bilfinger GVA’s Jennings.
Rental growth for refurbed space has already increased significantly, says Savills’ Williams, with more growth to come in the coming months. “In 2007, we had good quality refurbs at £27-£28/sq ft and grade A at £30/sq ft so there was a relatively small gap. Refurbs are now £24/sq ft upwards, but I don’t see why over the longer term that £30/sq ft is an unrealistic barrier for well-located refurbs.”
One of the reasons Williams is so bullish on rental growth for refurbed stock is because he believes it will help absorb occupier requirements during the period where grade-A space is at an all-time low.
Carmalt says the shortage of prime space is already “stimulating building owners to drive forward refurb programmes that they might not have otherwise done”, as it did in the early 2000s, when refurbed stock filled a void until new office space came along.
A number of developers are already on site with major office refurbishment schemes.
IM Properties is delivering 160,000 sq ft at 55 Colmore Row at the back end of next year, Bruntwood is doing 110,000 sq ft at 2 Cornwall Street, 140,000 sq ft will be brought to market at Baskerville House, with another 100,000 sq ft at Ballymore’s Three Snowhill, and Legal & General’s UK Property Income Fund II last month received planning permission for the refurbishment of 110,000 sq ft of office space at Temple Court.
“With strong growth in the Birmingham office market and the continued trend for major relocations in the city, the sensitive refurb of this landmark building will be an important step in meeting growing occupier demand,” explains Charlie Walker, fund manager to L&G’s UK Property Income Fund II. In addition to refurbishing the building’s existing six floors to a high standard, the fund is also adding a new seventh floor. According to Knight Frank’s Phillips, many of the office refurbishments under way in Birmingham city centre are not typical refurbs. “These are back-to-frame refurbs,” he says.
“These are more than just someone applying a lick of paint and changing the carpets. Effectively they’ve got the fabric of a building to work with and they’re renewing everything else.” This feeling of renewal is not just limited to the city’s old office stock - it is enveloping the whole of Birmingham, says Phillips. “Birmingham has grown up a lot in the last 10 years,” he adds. “The city has always been a bit self-deprecating, but it’s now a great place to eat and drink and a great place to live. It feels as if Birmingham isn’t embarrassed about itself anymore.”
This is a view shared by CBRE’s Hancox. “Based on occupier discussions, it’s one of the most exciting times I can remember. The energy, enthusiasm and self-belief the city has got is more evident now than it’s ever been.