Who to believe? If you ask the agents, Cambridge’s office market had a stellar year. Lambert Smith Hampton’s figures for 2011 show that take-up, at 653,000 sq ft, busted through the previous year’s 363,000 sq ft and the five-year average of 460,500 sq ft. Two massive prelets were signed and occupiers are on the prowl for more space.
Developers, on the other hand, are a little more cautious. Funding issues aside, they are not so sure that building the next corporate edifice would be a smart move. And the occupiers say, with choices slim, they are only moving when they absolutely have to.
Cambridge is definitely performing better than any other regional market. Yet, even the agents are pondering the outlook. In more hushed tones, they wonder if demand is not quite as good as it seems, supply is painfully thin and around 20% of take-up was accounted for by the massive Microsoft and Mills & Reeve prelets – deals which do not come along every day.
Over the next three pages we ask the agents, developers and occupiers to square up, go head-to-head and give their views on where the market is going.
Occupiers
Many say the lack of supply in Cambridge will force occupiers out of town, but is that always true? With its lease running out, law firm Mills & Reeve recently went looking for 50,000 sq ft of office space in Cambridge. At the end of last year, it signed for one of the city’s biggest prelets, at Botanic House on the junction of Hills Road and Station Road.
“It was challenging, the options for a firm of our size were quite limited,” admits partner Jamie Wheatley. The lack of space meant that the law firm considered the parks on the edge of the town – something most agents claim a professional services firm would never consider, but Wheatley says: “We looked but concluded that we did want to be in this part of town, with its access to London and proximity to the station. And we could see Microsoft coming into CB1.”
This left it with only three options: move to CB1 itself, Botanic House, or refurbish its existing premises. “Elements of Brookgate’s CB1 were challenging, such as whether it would be ready and if it left us with some lease exposure,” says Wheatley.
In the end, Mills & Reeve went iconic. “It was the tallest building in Cambridge, it’s fresh and new and modern,” he says.
Serious negotiations lasted 12-15 months and details of the deal remain confidential, but the firm is believed to have signed for £30 per sq ft on a 15-year lease with no breaks. A market rent-free was handed out. In Cambridge, 10-year leases are attracting 12 months rent-free.
Wheatley believes the firm got a “fair deal”, considering the flexibility of having the new landlord also own its old building, which helped derisk the speculative development.
Could he have pushed for more? “No, the options were limited, Johnny [Vincent, chief executive of Pace] knows that as well as we do, it is not an easy time to be negotiating,” says Wheatley.
The fourth floor will be sublet – expected to be to KPMG, although nothing has been signed yet – as will part of the ground floor, probably to an estate agent or similar tenant.
Developers
Last year, everyone thought we were coming out of recession, says Chris Goldsmith, managing director of Turnstone Estates. Now, nobody is quite so sure. “While the leasing markets are still very functional, the capital markets are not,” explains Goldsmith. If you want to spec, he adds, you are not going to get a traditional UK institution doing it.
The occupational market looks healthy, but Goldsmith warns about the distortion by the big deals of Mills & Reeve and Microsoft. “Cambridge is more normally 5,000 sq ft deals, and you have to do a lot of those to get to last year’s headline take-up number,” he says.
“The accountants are doing 10,000-20,000 sq ft, but I suspect that the take-up figures will falter somewhat [this year].”
Others, such as developer Brookgate, agree. But chief executive Sven Töpel thinks that, while there might be a reduction in the amount of space taken, it will be for higher-quality space.
Brookgate owns the 25-acre CB1 site by the station. Last year, it signed the city’s largest prelet, to Microsoft. But that has not given Töpel the confidence to go leaping forward. “Cambridge is a very lumpy market; there are lots of little deals of 3,000 to 5,000 sq ft, then there are a couple of large deals, but it is not a London market, where you get massive chunks of stock, it is very much a prelet market,” he says.
Despite getting the offer of speculative finance, Töpel says Brookgate will continue to pursue prelets. “[Spec] is not the right way to go you talk to Microsoft and it is delighted and thrilled, and if you build these things bespoke – that is the key to success.”
Others are putting their money in refurbishments. “The office market in Cambridge is faring well and is arguably the strongest market outside London,” says Jenny Mulligan, portfolio manager for the Crown Estate’s regional portfolio. But then Mulligan would have to be fairly bullish, having committed to redeveloping the 22,000 sq ft Cavendish House and refurbishing 11, 000 sq ft at Newton House, both on the Cambridge Business Park.
Will Mooney, partner, Carter Jonas: moving out
It is what Mooney calls the onion effect. There is currently about three-quarters of a year of good-quality stock left, and 2012 and 2013 will be fallow years for product delivery. So, by quarters three and four the reality of supply shortage will start to hit, he believes.
Cambridge occupiers are used to walking out the door and having an HQ ready for them, says Mooney. “We are trying to educate them, but they don’t believe what the agents are telling them,” he says.
In good times, companies want to be on the northern fringe. When that is not available, in desperation, they look to the next layer out, he says.
“2013 will be the year of the onion, when space will be at a premium, and I expect the latter parks to get the benefits.”
Do not believe that companies will move out? Mooney points to the BBC, which moved out of Pace’s development onto Cambridge Business Park: “That was because time had simply run out for them.”
Rob Sadler, director, Savills: refurb
There are currently only four buildings for occupiers wanting over 20,000 sq ft to choose from, says Sadler.
After that, with spec funding unlikely, it will be the refurbished market that will win.
The Crown Estate is currently refurbishing 11, 000 sq ft at Newton House – which Savills is acting on – and Sadler says, generally, if developers can “do it properly” then occupiers can retain the same level of parking, and “people are still prepared to pay a premium for that”.
But, there is still danger in building. The Crown Estate is currently redeveloping Cavendish House. Redgate Software had been interested in the space but walked away. Sadler says the Crown Estate is quite relaxed about losing the occupier. “It has a good building, and one of the only decent buildings available in Cambridge at the moment.”
Dick Wise, partner Bidwells: prelets and staying put
Wise says there are one or two significant occupiers potentially looking for space of 100,000 sq ft plus. However, he adds: “Whether they commit to anything, only time will tell.”
Occupiers who have to move now are probably in a very uncomfortable position, says Wise. “If you have very tight search parameters, then you need to start negotiating on sites. There is CB1, Johnny [Vincent at Pace] has more phases at the Hills Road site, but even taking that into account, there are not that many opportunities and they will take two years to develop.”
If you have a lease event, Wise says you are probably going to negotiate to hold over. With that in mind, Wise predicts that take-up for 2012 could be modest.
Mike Ayton, principal, Juniper Real Estate: steady: don’t get carried away
Grade A space still accounts for 47% of total availability, according to Ayton’s calculations.
“Given the stage we are at in the market cycle, with low levels of spec development over the past few years, we might have expected the supply of grade A to have dropped away sharply, as is the case with parts of the Thames Valley,” he says.
He adds that this supports his view that the market will remain steady this year, without any rent rises. “Occupiers do still have a choice, albeit they might have to consider a wider range of locations around Cambridge,” he says.
That said, there is zero grade A space in the city centre and, when compared with vacancy rates of 20% a decade ago, today the rate stands at a meagre 4% – a level which should normally trigger spec development.
That is unlikely to happen, says Ayton. Instead, he believes there will be refurbishment and a couple of secondhand buildings coming back.
Ben Green, director, Barker Storey Matthews: fewer incentives
Tenants are finding it harder to locate where they want to and get the deals they are used to, says Green. “I think landlords will be harsher with their rent-frees and there will not be a lot of movement in rents until new buildings on the science park come forward.”
For the tech companies, not many are planning far enough ahead to prelet. He says: “The tech companies grow suddenly; they don’t normally say they want 20,000-30,000 sq ft in 18 months.”
