Stephen Mallen analyses the prospects for a cluster of markets burdened with both towering oversupply and stagnant demand.
As a result of the downturn, the M25 between junction 16 (the M40 interchange) and junction 24 at Potters Bar is possibly the UK’s most oversupplied provincial business space market. The speculative development boom of the late 1980s left the area highly vulnerable. However, the long climb to recovery has begun and the prospects for new, quality space are improving rapidly.
The stretch of the M25 between the M40 and Potters Bar has a total office stock of some 30.9m sq ft within about 10 miles of the motorway. Currently, there is 5.8m sq ft of available office/B1 space in schemes of over 10,000 sq ft within the same area. This produces a qualified vacancy rate of 18.6% – a level of supply significantly greater than even that of central London. Of the total space available in the north-west M25 quadrant, 52% (3m sq ft) is new, while 48% (2.8m sq ft) is secondhand.
This high level of supply conceals important local variations. The Hertfordshire towns of Watford, St Albans, Hemel Hempstead and Rickmansworth now have vacancy rates of over 20%. These locations have been hard hit by the recession, which saw substantial volumes of new space come to the market once demand started to fall. A similar pattern emerges in the west London centres of Harrow, Hillingdon and Uxbridge, although here the size of existing stock means that rising levels of uncommitted development had less impact. In these areas, vacancy rates stand at 10% to 15%. Those locations avoiding the speculative boom – Barnet and the south Buckinghamshire towns – have managed to retain a degree of market balance, with vacancy rates of less than 10%.
Rapidly escalating supply during the past two or three years has meant that the development pipeline has slowed to a trickle. There is now only about 330,000 sq ft of space under construction in the north-west M25. Most of these schemes are either prelet or presold. This represents a near 80% decline on the level recorded only two years ago.
But, as seen in other parts of the M25 market, the volume of space with planning permission has seen an equally dramatic uplift through the recession. There is now 10.7m sq ft in unimplemented consents – an increase of more than 80% over the past two years.
Looking further ahead, estimated annual completions are forecast at less than 300,000 sq ft next year and under 750,000 sq ft in 1995. These figures make a dramatic contrast with the development peak of 1990, which saw nearly 4.5m sq ft delivered to the market.
On the demand side, the north-west sector of the M25 has suffered through the contraction in the relocations market. Declining corporate profitability (relocation typically presents the occupier with substantial short-term costs), and falling rents in London, have undermined occupiers’ ability to move and reduced the cost imperative which typically drives the relocation decision forward. However, an upturn in demand, since the start of 1993, is now under way. This arises largely from the gradual return to corporate profitability which has enabled business and premises strategy questions to return to the table. At least one major corporate occupier, relocating from central London, is known to have shortlisted two key developments within the north-west M25. More are likely to follow and demand should accelerate in the months ahead.
During the past year, take-up has totalled some 956,000 sq ft. Against current availability (5.8m sq ft), it is therefore clear that the north-west M25 has six years’ supply at current take-up levels. Two factors have to be taken into account when contemplating this alarming figure. First, recent take-up clearly relates to the bottom of the market cycle – demand is set to rise markedly in 1994-95, thereby eroding more rapidly the supply excess.
Second, market recovery is hampered by secondhand space, the availability of which remains constant. The supply position in respect of new space is more positive. Even at the distressed take-up levels recorded over the past year, annual take-up of new space has amounted to 795,000 sq ft (83% of all take-up). Against a total new availability figure of 3m sq ft, the new space market therefore has little more than three and a half years’ supply. While this is still high, a forecast acceleration in take-up in the next two years will reduce this figure.
In many ways, the north-west M25 owes its historical development and success to good infrastructure, particularly the motorway and Heathrow. Ironically, infrastructure considerations have become problematic in recent years, weakening the area’s credibility in the minds of potential occupiers. Rapid commercial development in the 1980s has opened up the prospect of overburdened infrastructure for the 1990s. Not surprisingly, developers who are active in the area have welcomed the upgrading of the M25. And local environmental opposition seems more muted than in many areas to the south of London and is therefore likely to be less of an impediment.
In due course, the entire stretch of motorway between junctions 16 and 24 will be four lanes wide. This is likely to be proceed in two phases. First, proposals for junctions 16-19 and the area around junction 24 are shortly to go to public consultation, with completion scheduled for 1996. The remaining stretch, between junctions 19 and 23, is set for public consultation late next year, with completion due in 1998. Clearly, the resultant increasingly fast flow of traffic could help the market as it climbs out of recession.
Somewhat overshadowed by the M25, but of almost equal importance, is the upgrading of the east-west A41 trunk route. The A41 is being duelled in a series of bypass projects which, when complete, will greatly improve travel times between junction 20 of the M25 and Aylesbury. The first stage of this cross-country programme – the Kings Langley bypass – is now finished, with the entire M25-Aylesbury link scheduled for completion in mid-1994. The volatility of the north-west M25 property sector contrasts with the comparative stability of the socio-economic environment.
In the 1970s, with the exception of the areas around Hemel Hempstead, the north-west M25 experienced pronounced population decline, particularly in the London boroughs. In the 1980s the area has continued to show a net loss of population. However, the rate of decline has been more modest and is largely the result of an ageing population rather than migration
Despite the rapid expansion of the business space market and service sector in the 1980s, the north-west M25 still presents a diverse economic structure. While office employment, especially financial services, is well over the national average, most Hertfordshire towns along the M25 still record manufacturing employment levels similar to the national average.
The area’s traditional industrial base also remains strong. Although contraction and economic slowdown has affected manufacturing, rising unemployment is caused by zero corporate growth rather than the shedding of labour. British Aerospace is perhaps the best known of the few exceptions to this trend. Local unemployment is now at 8% to 10% in the north-west M25, compared with 10.4% nationally.
A large section of the local unemployed consists of skilled young people, suggesting that there is a ready labour reserve for the incoming investor. The attractions of labour supply are enhanced by positive labour-cost indicators. With the exception of outer west London, where labour costs are distorted by the preponderance of London-bound commuters, average wage levels in the north-west M25, for both manual and non-manual staff, are significantly lower than the South East’s regional average.
In conclusion, the north-west M25 has clearly had a difficult journey through the recession. However, improving demand is reducing high oversupply as the area benefits from both improvements to local infrastructure and a positive labour market.
Stephen Mallen is a partner and head of research at Knight Frank & Rutley.
