Perfect timing? HDG Mansur’s move to start work on its Bridgewater House project will provide much-needed supply, says Stacey Meadwell
Developer HDG Mansur ended years of speculation two weeks ago when it erected cranes over the site where its 110,000 sq ft speculative office building, Bridgewater House, is now under construction.
Despite the ribbing HDG has received from those in the local market for failing to deliver on its previous assurances that construction would start, there are many who will now say it is a courageous move. Equally, there are those who admit the delay could be fortunate.
At the start of the recession, Bristol was faced with the prospect of a huge oversupply of new city-centre office stock. But the brakes were put on development and, after extremely tough letting conditions in 2009 – according to King Sturge, take-up was 49% below the 10-year average at 327,480 sq ft – the new decade has started off with more promise.
Vacancy rates remain in double digits. However, the agent says that, by the end of the first quarter, more than 300,000 sq ft had been taken in the city.
The most recent include NFU Mutual taking a further 22,500 sq ft at UK & European Development’s 123,000 sq ft Temple Back building, and Ernst & Young taking 20,000 sq ft at Cubex’s Paragon on a 20-year lease at a record rent of £27.50 per sq ft.
Only two buildings, totalling 65,000 sq ft, are due to be completed this year and, if this latest tranche of deals are all completed, none of the remaining new buildings will be completely empty, having each secured tenants for at least one or two floors.
Chris Read, head of development at HDG Mansur, says: “The last four deals in Bristol have been in the 20,000-22,000 sq ft size range, and that fits in with the size of floorplates we are offering. To delay further, you would risk not getting the best benefits of the current diminishing supply pipeline.”
Some in the market agree. Simon Price, a partner at Alder King, says: “In 18 months’ time, there will be limited supply in the city centre, so it is the right thing to be building something now.”
Generous incentives
HDG Mansur plans to complete Bridgewater House in May 2011, and now that agents no longer have to speculate on when construction will start, their thoughts are turning to what rents the building might achieve.
City centre office rents have held up reasonably well during the recession, albeit with some generous incentives. A rent of £27 per sq ft was achieved at Templeback when NFU took its initial tranche of space in the building, but this was negotiated back in 2008. According to King Sturge, the best rent achieved on a deal negotiated last year was £26 per sq ft at Portwall Place.
Jeremy Richards, partner in charge at King Sturge, is putting his marker in the sand by predicting that the quoting rent on Bridgewater House will be £29 per sq ft, and it will probably achieve between £27-28 per sq ft.
HDG was bullish when Bridgewater was first proposed, and predicted that it would set a new headline for Bristol. It even suggested it would break the £30 per sq ft barrier before the recession nipped such ambitions in the bud.
Tony Nicholas, head of department at Knight Frank, which is joint agent on the scheme with BNP Paribas RE and Strutt & Parker, says: “Next year, when we haven’t got the competition [from other new buildings], it will be a landlords’ market, and rents on Bridgewater won’t be less than £27.50 per sq ft.”
All this speculation assumes that the grade-A space still on the market finds occupiers. Although Q1 has seen a flurry of deals, some question where the next wave will come from. One agent, who did not want to be named, says: “Q1 could have the best take-up figures for eight quarters, but Q2 will probably be the worst.”
The agents on Bridgewater House will doubtless be chasing hard the mysterious requirement hawked around the market by the council (see panel, p79) but, aside from that, where might the deals come from?
Price can name three requirements. Two firms of lawyers – Veale Wasbrough Vizards and CMS Cameron McKenna – are each looking for 30,000-40,000 sq ft, and medical insurer Simplyhealth requires 30,000-40,000 sq ft.
Certainly, these would keep up market momentum were they to land this year. King Sturge predicts that take-up by the end of 2010 will be on a par with 2009. Last year saw only six deals of more than 10,000 sq ft, so what will boost market confidence is the size and quality of the Q1 deals.
Whether this will convince other developers with sites in the city centre to start work is doubtful. HDG’s funding is being jointly provided by Deutsche Postbank (previously known as ING BHF Bank) and HSH Norbank.
. Philip Leech, chief executive at Terrace Hill, which has consent for 50,000 sq ft in the city centre, says Bristol has a big office market for its size, but tends to suffer from an oversupply in boom times. “I think Bridgewater House is a brave move,” he adds. “I would have to see some growth in GDP before I’d consider speculative development.”
The requirement with no name
Mystery requirements are often given silly names. Project Monte and Project Bluebird are two recent examples, but one for a 75,000-100,000 sq ft city-centre location has been given no such moniker.
It is frustrating agents, not least because Bristol council is closely guarding the details.
No one wants to talk openly, but one agent did day: “It’s frustrating because the council wants us to come forward with our best deal, but how can we when we don’t know the covenant?”
There is much speculation, but the consensus seems to be that the requirement is from the private rather than public sector, involves a consolidation of several offices from different locations and other cities are being considered.
Bristol certainly has the space to accommodate such requirements, and several options close to Bristol Temple Meads railway station are apparently being considered. That puts in the frame: UK & European Development’s Templeback, partially let to NFU Mutual; HDG Mansur’s Bridgewater House, under construction; Temple Quay Central site, which has the basement in and ready; and Goodman’s site next to Temple Meads station.
A decision by the mystery company on whether to pursue the matter is due by the end of May.
Take-up in Bristol broke the 300,000 sq ft barrier in the first quarter compared with 327,480 sq ft for the whole of 2009
Only six deals above 10,000 sq ft were completed in 2009, half 2008’s number, with 59% below 2,000 sq ft
78% of all take-up was on deals less than £17 per sq ft
Vacancy is around 13% in the city centre compared with 18-20% in the early 1990s
Based on average take-up predictions and the current development pipeline, there will be no new stock available by the end of 2012
Innovative deals needed to let secondhand space
The last recession saw what the market first thought of as silly deals – 12 months rent free with a break at 12 months – but these proved to be canny propositions because tenants invariably stayed on after the break option.
With about 1.2m sq ft of secondhand space available and, according to King Sturge, secondhand take-up of 300,000 sq ft last year, it is no surprise that some similarly shrewd deals have been brokered during this downturn.
There has also been some vicious slashing of rents. LaSalle Investment Managers set the ball rolling 12 months ago, dropping quoting rents at buildings such as College House from £16 per sq ft to £10 per sq ft, and winning lettings as a result
But Simon Price of Alder King points out that cutting rents will not work for all landlords. “Others followed LaSalle, but some of the space was very poor quality, and dropping the rent just won’t make it attractive enough for people to want it,” he says.
There has also been some innovative marketing to get space away. Chris Grazier, a director at Hartnell Taylor Cook, marketed grey space at 35 Colston Avenue with an offer that he says will “beat any deal on a three-year term”. “It’s a fag-end deal, but we got a letting,” he says.
