Bridgewater House was a huge gamble. Developer HDG Mansur took the decision to speculatively build the 110,000 sq ft office building on the Finzels Reach development in Bristol’s city centre in March 2010 – a decision it had procrastinated over for a long time.
Now, with the chips down, everyone is keenly watching the building to see whether that gamble will pay off.
The building completed to shell and core in May last year, and accountant BDO took space at the end of 2011. But, at just shy of 9,000 sq ft, the letting was hardly the vote of confidence the market needed to justify the grand gesture that HDG had made.
Now, Michael Baker, HDG’s senior managing director and head of development in UK and Europe, says another deal is in the offing, and it is in talks for a much larger signing of 30,000 to 35,000 sq ft (see box). In the current market, that would be a big deal.
But Bridgewater House is not the only trawler looking to land a big catch. UK and European Investment’s Templeback, the only other large chunk of grade A stock on the market, is also ready and waiting, and the competition over who will land the first big deal in Bristol is hotting up.
Take-up in the city centre was 91,510 sq ft in Q1 this year, down from just over 159,000 sq ft in Q1 2011, says Alder King. In 2011, Jones Lang LaSalle says there were nine deals on grade A space totalling 138,000 sq ft, or one-third of all take-up. Since then, things have felt like they have been hotting up – even if the numbers cannot yet prove it.
Phil Morton, senior director at CBRE, says his gut feeling is that, behind the numbers, Q1 has been the best for a “good couple of years”.
“There have been a number of enquiries, but these are still the average size of 5,000-10,000 sq ft. We haven’t seen the a super-major, over-100,000 sq ft deal for a long time, or even one over 50,000 sq ft,” he says, adding: “The take-up for Q1 may be below average, but the second quarter will be significantly better.”
Axa Re’s decision to stay put and extend its existing lease was a blow, especially to Salmon Harvester, which had all but signed the 70,000 sq ft lease at its 2 Glass Wharf building.
But Jeremy Richards, international director and partner in charge of Jones Lang LaSalle’s Bristol office team, says: “A clutch of people have decided to do short-term things, but they will be back, and that’s when it gets interesting.”
He adds: “People talk a lot about Finzels Reach and Templeback, but two buildings is not a lot. There is less than 3% prime stock in Bristol, and that is as good as any of the six big UK cities.”
The lack of big deals means the headline rent of £27.50 per sq ft is likely to stay, even if there is hope that incentives will move in.
The fact that headlines have not changed is a good and a bad thing in agents’ eyes. UK and European Investments delivered 150,000 sq ft at Templeback at a time when others were cutting rents. “It got a lot of criticism for not taking a deal,” says one agent. If it had, he says, headlines might have slipped a small amount but there would likely be deals on the table.
Avoiding a panic
John Stacey, asset management director at UK and European Investments, is unrepentant. “We know the Bristol market well and we chose not to panic and do a soft deal – we took the stance that that sort of deal could be mopped up by the smaller bits of grade A and that would leave us a clear run,” he says.
A deal with NFU Mutual in the spring of last year, which swallowed up 45,000 sq ft in total, helped to soften any blow to the developer and cement that stance.
“Our decision to start [building] was taken in a slightly different market, but I think Bristol is strong and there is steady grade A take-up. Also, we are comfortable with the city,” he says.
Would the firm build again?
“I guess because we have got 70,000 sq ft to let, it would be a difficult sell to get the relevant people to commit to spec, but the point where it makes sense is not too far off.”
Stacey says that this year, realistically, the firm will do one or two deals in Templeback, but admits that it is between themselves and Finzels Reach.
Finzels Reach feels much the same. Baker says: “I think Templeback’s strategy is a good one. I am confident in the marketplace. There is an increase in demand, and while I am keen not to over-egg it – I do have a sense of proportion – we are not looking to do soft deals.”
The strategy for Bridgewater House was always to build counter-cyclically, explains Baker. “That strategy is now coming right for us in that the Bristol market has a low supply of grade A space.”
But those big deals are still eluding the market. Ideally, HDG Mansur was looking to get single floors away doing deals of a little over 22,000 sq ft. Its first deal, with BDO, fell far short of this. Baker says it did the deal because “BDO was a very, very strong covenant. It is the sort of occupier we wanted in Bridgewater House and we think it was a strong vote of confidence.”
Baker hints that he is in discussions at the moment for a larger deal, and that there will be another announcement in the “next couple of months”.
So would the firm take the decision to build again today?
“Because we have an office building with quite a lot of empty space in it, we would not be building the next spec until such time as we have leased out Bridgewater House,” says Baker.
Toe in the water
That is probably understandable, but it has not stopped the agents wondering when the next developer will dip its toe in the water.
A further signing at Bridgewater House would be much more than just a boost for the take-up numbers.
Many Bristol agents think that, with enquiries improving, getting a chunk of this building away will make other developers think very seriously about delivering stock into the starving grade A market. Getting funding for a prelet, however, is quite another issue.
Chris Grazier, director at Hartnell Taylor Cook, says: “For a prelet you need to be doing 40,000-50,000 sq ft and we get a couple of those a decade. They are not coming along in the next three months.”
He believes the first signs of improvement are there and that the first sign of the spec market coming back will be spec refurbishments happening, such as One Victoria Street in Bristol, where Cubex and Prupim will start work on the 47,000 sq ft office this summer.
Jones Lang LaSalle’s Richards is also sceptical about the spec outlook.
“Finzels Reach probably went into it with its eyes open, but it probably didn’t expect the double dip,” he says.
He points to Royal London Asset Management, which has recently launched a marketing campaign – along with new images seen for the first time here – at Glassfields and has internal funds to develop. Salmon Harvester and the NFU could also build.
But even if they had a prelet in place, getting development off the ground would be tricky. Richards asks: “How many prelets have been done in the city centre in the past 24 months? There were five in the UK’s top six cities.”
People now might like the idea of spec. But could they get funding? Even with a partial prelet, it would be “difficult if not impossible”.
Bristol market requirements
HDG Mansur claims to have a deal in the offing. So who might it be? Local agents seem to know little about this deal. Many think it might dovetail nicely with a 30,000 sq ft requirement Cushman & Wakefield is handling. The London-based agent has kept the name behind that requirement very close to its chest, but it is hardly imminent, said one Bristol agent, because it has only just asked for proposals.
Others circling the market are Canada Life, which is looking for up to 40,000 sq ft to exploit a lease expiry, and training provider BPP with a 40,000 sq ft requirement that most agents think would sit nicely at Bridgewater House.
Babcock & Brown had been looking for 20,000 sq ft but a deal is now thought to be under offer at Aztec West, out of town. Balfour Beatty is the only other name on agents’ lips, but the 20,000 sq ft requirement is said to be under review.
Serviced offices
Maybe it is the fact that corporates are shy to commit to lengthy leases. Maybe it is the lack of stock or the fact that many do not know where, or how big they will be, in five years. But serviced offices in Bristol have definitely seen an uptick in lettings in the past few months.
Orega says that, after 10 signings since December, its 27,000 sq ft business centre at 10 Victoria Street is now 90% occupied. And it is not just the start-up businesses that are taking an interest.
Jeremy Hampton, sales and marketing director at Orega, says: “Those moving from conventional to serviced office space often don’t want to commit to the longer-term leases of traditional offices.”
But once there, they do seem to stay. Hampton says that although space is available for as short as three months, some of the clients have been there for as long as eight years. He points to ISL Recruitment, which said it had moved in off the back of “planned accelerated growth over the next four years”.
