There is good news and bad news in Southampton’s city centre office market. First the good news. Occupational deals have finally increased, sparking a rise in the city’s take-up. But on the down side, Southampton is now suffering historically low levels of vacant space. Will this push up rents enough to make new office development viable?
The final lettings at Charlotte Place, a 2006-vintage 82,600 sq ft office block that was the last speculative development in the city centre and the last office building under 10 years old, are the most recent deals in a speculatively built office scheme.
“Demand in the office market was really bad,” says JLL director Michael Green. “For example, it has taken more than 10 years to let Charlotte Place. But supply is going down and there will be a tipping point where there just won’t be enough space.”
A brave developer now needs to take the bull by the horns, says Martin Hastelow, head of offices at Savills. “We’ve just come out of a very difficult market and it’s a bit chicken and egg because developers want to see evidence of great deals before they build something, but until someone builds something… it’s a circle.”
Demand has definitely increased. City centre take-up in the first half of 2015 reached 64,242 sq ft, according to CBRE, nearly 74% of the total take-up for 2014 (111,668 sq ft, also according to CBRE), with most deals being for grade-A space.
One of the largest city centre deals this year was the 10,000 sq ft letting to PwC at Oceana House. Solicitor Bond Dickinson sublet the firm’s remaining third floor at £16.50 per sq ft. But this is only a short-term lease while PwC’s office in Ocean Village, on the River Itchen, is being refurbished.
With no new space in the development pipeline, and reducing levels of secondhand space, refurbishments are the order of the day. Refurbs such as Mountbatten House and the White Building – formerly Queens Keep – could spur rents higher. Lambert Smith Hampton’s head of office, Graham Holland, says: “The shift of value is enormous. There is an opportunity to make a serious profit.”
In line with this shift, rents have increased by up to £4 per sq ft throughout the South Coast. Headline rents in Southampton’s city centre stand at around £20 per sq ft and are showing yet more evidence of a landlord-driven market, particularly for those who can deliver refurbished buildings.
Meanwhile, with the permanent extension of permitted development rights, even more office space will leave the market for residential conversion.
Available office space in the city centre stands at 554,093 sq ft, but the amount of grade-A stock among that is harder to quantify, says CBRE.
Savills’ Hastelow estimates it has fallen below 20,000 sq ft, while agents at LSH say that if grade-A stock is defined as “new”, then there is nothing at all – making it the lowest it has ever been.
Hastelow says: “There have always been periods when we have had very little new build as speculative developments tended to come in one at a time, but now it is tighter than it has ever been. Everyone is looking at which building they can convert, so there is more pressure.”
But it is the figure of £25 per sq ft that is required to make much-needed new office development financially viable, and the market is some way off.
Market observers appear to view Southampton city council chief executive Dawn Baxendale favourably and see her as being “hugely proactive” in driving forward new development.
The council has drawn up a masterplan to stimulate development and improve the public realm and business offering in different quarters of the city.
Hopes for new office in the city centre seemed pinned on the key office sites in the council’s masterplan, Station Quarter and Royal Pier Waterfront (see box, left).
Baxendale says: “Southampton has £1.6bn of development activity already either building, coming out, or in planning, and that is quite an impressive position.”
Of this figure, roughly 660,000 sq ft is for office development, which includes 500,000 sq ft proposed for the Royal Pier Waterfront (see below).
Baxendale says recent refurbishments have probably “pushed the tipping point [for office development] back a little bit”. But she adds: “We’re still talking about only two office buildings [Mountbatten House and Queens Keep]. There is an opportunity between those and the masterplan developments.”
But if city centre office space is allowed to continue to diminish and no spec development comes forward, Southampton faces the prospect of losing occupiers to other locations.
In this scenario, Baxendale says: “I think we will have to recycle our existing provision and work with key developers to think about our current sites coming forward (including Station Quarter, Royal Pier Waterfront and smaller sites in the masterplan) because the council is not in a position to speculatively build.”
Many agents hope the city’s retail and leisure developments and improved infrastructure will also attract occupiers.
Lambert Smith Hampton’s Andy Hodgkinson says: “The city centre’s image is evolving. There are a lot of new retail schemes, such as the Cultural Quarter, which are changing the face
of Southampton.
“And a whole load of existing office stock is now converted to residential, which has reinvigorated the high-street restaurant and retail schemes.”
Now it is time for the city centre’s office sector to also be reinvigorated. The market is waiting eagerly to see what happens next.
Portsmouth: Rising take-up
Sandwiched between greenbelt land and the sea, Portsmouth’s office market is singular. But the situation there seems similar to Southampton. Tom Holloway of Holloway Iliffe & Mitchell says Portsmouth has never had a major office market compared to its larger neighbour.
Despite this, there has been an increase in take-up and interest in the area, inhibited by a shortage of supply and limited land on which to build. Permitted development rights have taken away decrepit stock and poor road infrastructure risks isolating occupiers in remote areas.
Lakeside North Harbour, an out-of-town business and retail park, commands rents of £19 per sq ft.
Other areas for potential growth are the Northern Quarter and key council-owned sites, such as Chaucer House, for which the council is seeking a development partner.
Holloway says: “The main driving force is going to be Lakeside. It does attract a lot of businesses to the area. The lack of quality buildings and development has really put a squeeze on things. If you are going to build something brand new, rents are going to be pretty steamy, although you have to find land to build it on.”
Southampton: Out of town rules
The city centre’s loss is the out-of-town market’s gain as demand leads to business park take-up. Lambert Smith Hampton’s figures show 421,551 sq ft of take-up along the South Coast, to Q3 2015 – a small increase of 2,391 sq ft on the total 2014 take-up figure of 419,160 sq ft. LSH expects take-up figures to breach 500,000 sq ft before the end of this year along the South Coast – from Southampton to Winchester and along the M27 corridor, up to the A3 and Petersfield.
Meanwhile, market observers believe Gateway House in Chandlers Ford has been a catalyst in attracting out-of-town occupiers. After significant refurbishment of the 52,000 sq ft building, KPMG and Konica Minolta both committed to a 10-year lease at £18.50 per sq ft and £19 per sq ft, respectively. Quoting rents are now £19.50 per sq ft, reflecting a 5% increase in 12 months.
Another popular choice is the
40,000 sq ft Spectrum building, in Solent Business Park, following its recent refurbishment. Cooper Homewood took 3,704 sq ft in August, achieving a headline rent of £10.50
per sq ft, rising to £12.50. The company will join tenants Mitie, Icomm and Options Resourcing.
Holding out for a hero
Southampton’s agents still believe that if spec build was to happen, occupiers would come. Two key sites that have the potential to make a big impact on the market are the Station Quarter and Royal Pier Waterfront, key mixed-use projects in Southampton city council’s masterplan that will, it is hoped, deliver grade-A office space.
The Station Quarter includes land north and south of the mainline station and the station itself. There are plans to improve access to other parts of the city and create a new business district, with developments in the Nelson Gate area expected to deliver 160,000 sq ft of offices. The council is seeking a development partner.
Meanwhile, the Royal Pier Waterfront scheme is the “jewel in the crown” for the city, and has been in the pipeline for a number of years. The partnership behind the scheme – which includes the council, the Crown Estate, Lucent and ABP – submitted plans last month for the £400m project to deliver new waterfront shops, restaurants, homes and 508,000 sq ft of offices. If the plan
is approved, as expected, in summer 2016, the development could be
complete by 2018.
It is hoped the project will transform Southampton into a leading international commercial centre appealing to a
diverse range of occupiers. However, implementing the complex, large-scale plan poses some difficulty as land will need to be reclaimed from the sea.
JLL’s Michael Green believes the scheme would have to be comparable to Gunwharf Quays in Portsmouth or Canary Wharf in London to really make waves in the market.
He says: “If you spec something fabulous down by the water, I reckon you could get rents of about £26 per sq ft. And if you create something that has a real ‘wow’ factor, we might get
a big organisation prepared to take 200,000 sq ft.”
