COMMENT Office take-up is generally a good barometer of the state of the economy.
It tracks general economic activity – in boom times, we see high volumes of space transacting and net rents go up, while in weaker periods or recessions, fewer transactions complete and net rents go down. There are other more micro factors – development lag, planning, supply levels – but in general terms if the economy is performing well, the Edinburgh office market performs well.
Last year, the number of transactions recorded was 21% above the long-term average. That followed 2022, when deal volumes were up by 15%.
Despite the market perception that all businesses are reducing their office footprints and seeking smaller offices, the driver behind 74% of all moves above 2,000 sq ft was expansion.
Predominately this was SMEs, scale-up tech firms and energy companies. The vacancy rate across the big nine cities now stands at 9.5%, while in Edinburgh it is 6.9%.
The consequence of this supply and demand imbalance is that Edinburgh has seen rental growth of 13% since Scotland fully opened up, post-lockdown, in February 2022. By the end of last year, prime rents had reached £43 per sq ft – the highest in the UK regions. This rose further during the first three months of 2024.
Bucking trends
If Edinburgh is bucking trends, what is fuelling this activity? Perversely, one driver may be the UK’s weak economy.
Many businesses openly encouraged staff to increase their hours in the office to enhance productivity and collaboration among colleagues. Having the right environment to achieve this is vital, so securing “best-in-class” buildings, to ensure the work setting and staff wellbeing is front and centre for companies to retain and attract talent, is a key driver for many office moves.
Hybrid working is clearly a major factor in moving office now, as having fewer people in the office at any one time means smaller offices for many companies. Therefore, securing premises that are the right size for new working models is critical given the potential cost savings this can generate.
Changing requirements
Location remains important but aspects such as active travel facilities and public transport connections have gained importance for many businesses post Covid. In Edinburgh, this has seen a focus of letting activity on the core city centre with 81% of all moves recorded here since the lifting of Covid restrictions, compared with 65% prior.
Workplace design has gathered importance post Covid too. With variations of hybrid working and a focus on collaboration and social engagement for many organisations when staff are in the office; the office lay-out and working environment has become a crucial tool for businesses meeting their goals and cultivating the culture of the company; while at the same time giving staff an office they want to work in.
We have also seen larger organisations with multiple offices seek to consolidate their operations into fewer buildings, while Edinburgh has been awash with requirements from serviced office providers over the past 18 months looking to offer more flexible leasing options for companies unwilling or unable to commit to five- or 10-year leases.
Three options
The city’s office market is arguably at a crossroads. Demand remains strong but with limited space available in the city centre and a constrained pipeline of new stock, it seems inevitable that take-up levels will fall in the short-term.
Edinburgh occupiers will likely be faced with three options as they approach the end of their leases: compete for new city centre space, pushing rents up further; consider alternative locations such as Edinburgh Park, South Gyle or Leith; or invest in adapting existing accommodation and extending leases.
As Edinburgh’s new-build office development cycle has fallen out of alignment with the UK’s economic cycle, it becomes more difficult to use office take-up figures as a snapshot of how the local economy is performing.
Therefore, considering new office take-up in isolation is unlikely to paint the full picture of what is really happening in Edinburgh’s local economy, particularly given that the city’s employment base is predicted to grow by over 8,000 over the next five years. In addition, the latest Oxford Economics forecasting has Edinburgh’s economy returning to growth in 2024, which is then predicted to strengthen in 2025 and 2026.
Peter Fraser is director, agency, at Avison Young
