Tough market: Pessimists point to oversupply, optimists to demand, but agents say realistic developers will profit whatever the case as long as they provide quality accommodation in the right place
Maybe it is just Northern grit, but Manchester’s office agents are waving aside talk of the downturn. The market is getting tougher, they concede, but oversupply is not on the agenda.
The statistics suggest otherwise. Around 800,000 sq ft of grade A stock will be completed this year in addition to the 120,000 sq ft already gathering cobwebs.
Optimists will point to 2006’s stellar prelet market, which means that more than 200,000 sq ft of this year’s new stock is already spoken for. For example, at Allied London’s Spinningfields, 40% of the 350,000 sq ft 3 Hardman Street, which will be completed in October, has been prelet to Barclaycard, Regus and law firm Pinsent Mason. “If you look at the headline figure, there’s a large amount of space coming through,” says Cushman & Wakefield partner Tony Bray. “But if you drill down and look at which buildings have space committed, the pipeline figures don’t look as harsh.”
Prime buildings
Pessimists, meanwhile, will protest that the lettings still leave more than half-a-million sq ft to hit the market speculatively this year, which, in addition to current supply, is more than two years’ worth of stock in a market that cannot count on another strong year of deals.
They will point also to the disquieting presence of prime buildings in Manchester’s traditional core that are struggling to find occupiers. These include CTP’s 56,500 sq ft Aurora, which is nearly 90% vacant, and Wrather Group’s 75,000 sq ft Zenith, less than 30% let.
DTZ director Ken Bishop waves this aside: “We have to provide choice to occupiers. The fact that there are winners and losers keeps the market healthy.”
Most agents believe that the outlook is straightforward: build quality in the best locations and you will find a thriving occupier market build poorly designed product and occupiers will not take the plunge.
Agents complain that too many developers have built inflexible buildings, conceived when the market was crying out for stock. But these schemes, they maintain, should not be Manchester’s yardstick.
“There will always be unsuccessful schemes, but the problem is that they colour the performance of the marketplace,” says WHR partner Michael Hawkins. “You have to ask why schemes such as Aurora have remained unlet while companies have taken prelets elsewhere.”
Hawkins argues that funds see Manchester’s best buildings as an opportunity. He points to the recent commitment by Chris Bartram’s Orchard Street Investment Management to forward-fund £50m for Wilson Bowden’s 103,000 sq ft Belvedere House.
“The fact that the development attracted a very sophisticated fund at a time when most aren’t doing anything shows investors have confidence in the occupational market,” he says.
Notwithstanding the confidence funds are showing, where will the demand come from?
Expansion space
Agents are even more secretive than usual regarding requirements. Despite assurances that the financial sector remains active, only Bank of New York’s 50,000 sq ft search for expansion space is name-checked, although agents allude to two US banks that both have 50,000 sq ft-plus requirements.
There are whispers of some professionals seeking space, with law firm Pannone and consultancy PricewaterhouseCoopers rumoured to be in the market.
“In the short term, the market is going to be hard,” admits Argent executive director Stephen Tillman. Along with the Carlyle Group, his firm is building the 190,000 sq ft Three Piccadilly Place, which is around 10% prelet. “With the right product in the right place, however, buildings can let,” he says.
For Stuart Lyell, project director at Allied London – which is seeking a tenant for 200,000 sq ft at 3 Hardman Street – one sector in particular looks promising. “In the professional services and support services sector, there are a number of companies in Manchester aiming to consolidate and expand,” he says.
More evidence of active occupiers will be necessary in the remainder of the year, especially considering that two public-sector lettings recently fell through at Three Piccadilly Place. The Government Office for the North West and the Highways Agency were expected to sign for 30,000 sq ft and 25,000 sq ft, respectively, until central government required that they move into existing public-sector space at neighbouring Rail House.
All this means that 2008 is unlikely to see rental growth. Grade-A headline rents on larger floorplates are between £28 per sq ft and £30 per sq ft, and few believe this is the year to push for more. Lyell says of Spinningfields: “We don’t want to push rents on at the risk of losing a transaction.”
Reckless developers
Some suggest incentive packages will play a greater role. Philip Meakin, partner with P3 Property Consultants, says: “It’s a tenant’s market in terms of rent-frees. If you want 30,000-40,000 sq ft you can find it in around five buildings, and I’ve heard rumours of rent-free periods in excess of three years.”
Hawkins believes such incentives are a false economy. “Some reckless developers have offered large incentives by relying on low yields to make the scheme stack up,” he says. “Yields have come out now, so developers cannot use them as a get-out-of-jail-free card.”
Despite static rents, uncertainty regarding incentives and a healthy pipeline, developers are not dissuaded from planning the next wave of city offices. Argent’s Tillman says its Elisabeth House in Peter Square – a scheme that will “almost certainly” be built speculatively – could provide 350,000 sq ft of offices by 2010-11. A raft of other schemes on the city-centre fringes are also in the pipeline (see p132).
According to Bishop’s DTZ colleague, Rupert Barron, the state of the investment market will force developers of these schemes to carefully consider whether to press on.
“It might take the heat out of the market, and the credit crunch might have come at exactly the right time for Manchester,” he says.
The message from Manchester is that sensible developers still stand every chance of success. This year’s occupational activity will determine how accurate that really is.
Market at a glance
Total city-centre take-up in 2007 was 1.01m sq ft, up from 937,000 sq ft the previous year, and 80,000 sq ft more than the recent five-year average
Grade-A take-up was 346,806 sq ft – 34% of total take-up – up from 8% of the total in 2006
Prelets in 2007 accounted for just 9% of take-up, whereas in 2006, prelets accounted for 34% of the total
Headline rents increased by £1.50 per sq ft to £30 per sq ft last year
Grade-A availability at the end of 2007 stood at 118,700 sq ft
During 2007, 645,000 sq ft of grade-A stock was completed
Between 2008 and 2010, 1.3m sq ft of grade-A space will be completed in central Manchester. Around 773,000 sq ft of prime offices will be completed this year
Source: DTZ/King Sturge
Key acquisition helps DTZ to gold
Perhaps DTZ’s purchase of that other Manchester stalwart, Donaldsons, helped it to drum up last year’s winning performance.
The firm let or sold more than 500,000 sq ft last year, including 132,000 sq ft to Network Rail at the Square One scheme, on which it acted with fourth-placed Lambert Smith Hampton for landlord Bruntwood.
Second and third places went to two locally based agencies. WHR, now in its fifth year, won silver, with the bronze snatched by Edwards & Co. Unsurprisingly, Erinaceous propped up the table in its final year in the Manchester market, with a swan-song performance of 80,000 sq ft.
