Pier pressures Southampton’s office market is holed below the waterline. Can hope be dredged up from anywhere? Stacey Meadwell reports
When one of Carnival’s luxury cruise liners leaves the port of Southampton for some more exotic location, there are more than a few forlorn faces left behind. And the same can be said for the company’s former office stock.
The cruise operator’s high-profile consolidation into 150,000 sq ft of new offices in the city is coming to fruition, but it is leaving a trail of empty, secondhand office space in a market that is already oversupplied.
Compounding the problem, this comes at time when, according to CB Richard Ellis research, there was no deal larger than 5,000 sq ft in quarter three.
CBRE deputy managing director James Brounger says: “Statistically, we are going to have an awful year. There are some deals under 5,000 sq ft, and deals are being negotiated that are likely to come through in Q4. However, I’m not expecting take-up to exceed 50,000 sq ft by the end of the year.”
Figures from Savills, showing take-up to the end of Q3 languishing at less than one-quarter of last year’s full-year total, back this prognosis. Therefore, if landlords of secondhand space are to get a look-in, they will have to consider significant refurbishment.
Look different or cost less
Graham Holland, director at Lambert Smith Hampton, says: “You have got to have some idea as to how to make your building stand out from the pack.”
Not surprisingly, there is a downward pressure on rents, says Andrew Archibald of Keygrove. He gives Kilgraston House as an example.
The 5,000 sq ft building was refurbished and put back on the market at a rent of just £3 per sq ft – when the market rent would be more in the region of £8-£9 per sq ft. Archibald says: “James Scott and BNP Paribas Real Estate are agents, and have let one floor – which is good, because they’ve let quicker than anyone else. But it’s at £3 per sq ft for three years.”
Philip Holmes of BNP PRE says that the landlord took a pragmatic view and decided to do a deal that would cover his costs, rather than face the empty rates liability.
Archibald believes that there is a further dip in rents to come, as landlords feel the pressure of having empty space. He says: “I think 2009 hasn’t seen landlords thinking, ‘We’ve got to do something to let this space.’ They’ve been thinking, ‘Let’s be patient and someone will come along.’ We’ll see some more discounting.”
At the other end of the scale, there is very little in-town grade A space. McAleer & Rushe let the third floor of Charlotte Place to solicitor Berrymans Lace Mawer at £17.50 per sq ft earlier this year, leaving 70,000 sq ft – the only sizeable chunk of top-quality space available.
There is nothing else under construction, although there are schemes with planning permission. Among the largest of these are PPG’s 108,000 sq ft Grosvenor House, Development Securities’ 60,000 sq ft at West Quay and Terrace Hill’s 117,000 sq ft Mayflower Point, which is part of a mixed-use scheme.
But the likelihood of any of these developers building are slim at best with market conditions as tough as they are. Martin Hastelow of Savills explains one of the barriers. “Even if deals go through, they have big incentives attached, so development isn’t viable,” he says.
Terrace Hill has forward-sold the residential element of its scheme to Crest and THG. Development director Nigel Wakefield says that it will start on site next year, but will wait for a prelet before starting on the office element.
One agent, who wished not to be named, quipped: “There is somewhere between Bob Hope and No Hope of these schemes happening speculatively in the near future.”
However, prelets in Southampton are a rarity, with one veteran of the market claiming to remember every prelet of his career. And occupiers would have to pay rents above the level that has been achieved in recent deals.
Michael Green, partner at King Sturge, does not believe that rents will recover until 2011, although he thinks that incentives will start to be reduced from spring next year.
So, it looks like development activity in 2010 is likely to be limited to more refurbishment – which is frustrating for some.
Green says: “Existing stock is being absorbed and, as we come out of recession, whoever is brave enough to fund one of these developments, we are confident they will let it.”
What floats your boat?
At the time of the Boat Show in September, Kilmartin unveiled a £325m masterplan for the Royal Pier that would see it transformed into a Barcelona- or Sydney-style waterfront. It proposes offices, retail, leisure and 1,000 flats, as well as a permanent home for the Boat Show itself.
Southampton council is under no obligation to pursue Kilmartin’s plans, and it is not the first time that there have been ambitions to make better use of the city’s waterfront.
So, what do those in the market think?
Michael Green, King Sturge
“It is the largest and most expensive development in Southampton ever, by a long margin. You have to question whether it will happen.”
Andrew Archibald, Keygrove
“The plans didn’t stack up when there were going to be 3,000 flats in the good times. How on earth can it stack up now? What developers are going to invest in developing large quantities of premium flats after most have had their fingers, hands and arms burnt severely in the past few years?”
Graham Holland, Lambert Smith Hampton
“There have been at least two false starts. The major driver is to accommodate the Boat Show, longer term.”
Retail: success and struggle
While the city’s West Quay retail centre buzzes with shoppers, Parkridge Developments’ Bargate Centre seems to be struggling, with a worrying number of vacant units.
Jeremy Braybrooke of Goadsby is letting agent. He says: “Bargate is looking a bit sad. There are some retailers there that are struggling on, and we’ve been instructed to let space on a short- or long-term basis.”
The centre, which has an awkward cul-de-sac design with no obvious anchor, is in need of a makeover.
Parkridge intends to knock it down and rebuild it as a pedestrian arcade with an anchor store. The developer owns the building occupied by Debenhams on Queensway, which it plans to replace with residential. Debenhams could then become Bargate’s anchor.
Last July, the developer told the local press that it would not be submitting a planning application until economic conditions improve.
Braybrooke says that, ultimately, redevelopment is the only option – but he admits that he does not know “how, when and if that will happen”.
He adds that West Quay remains the city’s big success story, with low vacancy and units letting quickly.
There have been few deals to give evidence of rents but, certainly outside the centre, there is a downward pressure. Colliers CRE research shows that prime zone As have dropped by £25 per sq ft to £350 per sq ft since last year.
As with town centres around the country, the secondary locations have been hardest hit, as retailers take advantage of favourable terms in locations they previously would not have been able to consider.
