It had to happen eventually. The stream of conversions to student accommodation has left Nottingham with a dearth of high–quality office space. Now the market is stepping forward to fill the gap.
There are four notable city centre office refurbishments in Nottingham at present: Park View House, City Gate, 37 Park Row and New Castle House. Together they comprise circa 180,000 sq ft – no small amount when annual typical office take-up in the city core is 200,000-250,000 sq ft.
Somewhat unusually, it is London money financing the refurbishment projects. F&C REIT owns Park View House, City Gate and 37 Park Row, while investment fund CCLA bought New Castle House earlier this year.
“Ten years ago the banks featured in this activity,” says Matt Smith, lead director at JLL in Nottingham, which has acted on all four of the refurbs. “A local investor would buy a building, borrow from a bank, refurb, let the property and enjoy the income. This time the banks are nowhere to be seen.”
Smith says improved economics, owing to yield compression and rising rent levels, have spurred the likes of F&C REIT into action. “I’ve been surprised by the speed of the recovery in terms of good-quality accommodation, which has been achieving new levels of rent for refurbished space – £15-£17.25 per sq ft. Five years ago the levels would have been £10-£14 per sq ft.”
F&C REIT’s Simon McIntosh says the company achieved £16.50 per sq ft for the 15,000 sq ft, 1990s-built Park View House, completed in December 2013. By the end of September, 10-year leases to accountancy firm Mazzars LLP and lawyers Gateleys LLP had been secured, meaning the property is 88% let.
“We recognised a lack of immediately available grade-A space,” says McIntosh. “And we recognised that tenants’ needs have also changed: they want good-quality, open-plan, air-conditioned space with showers and so on.”
Why Nottingham? “A number of the funds we service have high exposure to Nottingham office buildings, so we are naturally very close to the market. We felt confident that a high-quality refurb would let and so it proved – the combination of higher rents and longer, 10-year leases justified the works.”
F&C REIT has now turned its attention to its 25,000 sq ft 37 Park Row, which is about to undergo a comprehensive refurbishment to take advantage of the improving market. Meanwhile, JLL has put out to tender the vacant 16,000 sq ft third floor of CCLA’s New Castle House, which is being refurbished to grade-A standard and has received strong interest from two contact centre requirements.
Is this the start of an office refurb boom in Nottingham? Well, perhaps not.
“It has been tricky to justify to clients that they would get a better return on refurbs, rather than selling for residential,” says LSH’s Phil Quiggin. “As the office market continues to improve and the quantity of decent stock reduces, it’s inevitable that office refurbs will compete better as terms improve. But it’s not happening in any great volume.”
JLL’s Smith agrees that the growth for residential remains strong, but thinks conversions will slow down. However, secondary and poor-quality buildings in weaker locations “may well still go for conversion”, but better ones “maybe refurbished offices or residential”.
CCLA property fund manager Roy Halliday says the firm is not actively targeting Nottingham but would be happy to make a commitment for the right building in the right location.
“We saw this as an opportunistic purchase in an improving market,”
he says. “We believe the regional office market in the big centres is moving in the right direction and we’re coming into this at a good time to capitalise on that.”
Elsewhere in the East Midlands
In other East Midlands conurbations, sadly, the refurb news is not so hot. In Leicester, there is a similar shortage of good-quality stock, but ever fewer refurbs. “We have an extreme shortage of high-quality space in the city centre, but there are limited vacant buildings for refurb,” says Jane Taylor, director at LSH’s Leicester office. LSH has recently started marketing details for a full refurb at the 30,000 sq ft 20-40 New Walk, while plans are being drawn up to revamp 16,000 sq ft of lease-expired space at St Johns House on East Street, opposite Leicester station.
In Derby, the 20,000 sq ft Cardinal Square scheme is to be refurbished by Birmingham-based Nurton Developments. Derby is awash with low-quality space, says Nick Hosking of Innes England: “We have a complete oversupply of average and poor-quality grade-B space here, much of it released by Derby city council.”
While there is little grade-A space in Derby, further evidence of refurbs comes via the Railway Technical Centre campus on London Road, which is being transformed in to good grade-B/low grade-A standard.
