Here is a little brain-teaser, a version of property Sudoku to keep you sharp. Suppose office rents need to be £23-£24 per sq ft to make speculative development viable. Now suppose that the highest headline rent is less than £20 per sq ft – and the bulk of the market is closer to £17.50 per sq ft. Would you launch a 460,000 sq ft speculative office scheme?
A bit of a risk? A little too far ahead of the curve? You might think that, but Sladen Developments, which has taken control of Nottingham’s 460,000 sq ft Unity Square development, could not possibly comment. Indeed, it declined EG’s offer to talk about its plans for the much-watched Nottingham scheme. Yet, unexpected as it may seem, its advisers say Sladen’s answer to the would-you-wouldn’t-you question is a surprising: “Yes, maybe, and soon.”
Sladen, based in South Normanton, and its Belper-based partner Peveril Securities, acquired the stalled development site from Manchester-based Peel Holdings in June. Sladen approached Peel, it is said, and Peel felt it was an offer too good to refuse for what observers say was a time-consuming project, peripheral to Peel’s main interests. The sale price is the best-kept secret in Nottingham. Estimates vary from just under £10m, down to £2m-£3m.
The new owners are cracking the whip: a reserved matters application will be made next month turning the four-tower courtyard proposal by Peel into a more outward-facing three-tower scheme. Assuming planners approve, Sladen and Peveril will demolish the existing Sovereign House and start clearing the site early next year.
Will there be a speculative start on offices? John Procter, director at Nottingham agent FHP and an adviser to Sladen, makes encouraging noises about the prospects for a 170,000 sq ft first phase, including a 60,000 sq ft hotel.
“Yes, there’s a chance they could do some of the first phase speculatively,” he says, “if they get a prelet on some of the office space.” He adds: “They don’t need third-party finance – they can do it from their own resources in the first instance – so they could do two buildings in the first phase, including the hotel.
“We have decent discussions going with potential occupiers and we’d need something to come out of those to kick-start the scheme for summer 2016.”
Last year it was reported that Peel was talking to the city council about a 25,000 sq ft prelet to unlock the first phase.
Proctor insists that growing demand and shrinking supply for city centre office space means it is only a matter of time before someone signs for Unity. The best guess is that just 6,000 sq ft of grade-A space remains on the market, and around 60,000 sq ft of good grade-B.
“Demand is considerably in excess of supply – and the suites that are on the market aren’t compatible with much of that demand, particularly for the bigger requirements,” says Proctor, whose own firm has let 200,000 sq ft so far this year.
According to the latest research from Lambert Smith Hampton, Nottingham office take-up totalled 95,873 sq ft in Q2, with just over half of the 26 deals recorded in the out-of-town market. Total take-up in 2014 was 370,000 sq ft.
The difficulty for Nottingham – however much it injures local pride to point it out – is that the city’s office market rents are leagues below that of the core regional cities. According to JLL’s September 2015 Core Cities data, the average rent in the main eight regional markets is £29 per sq ft, rising to £30 per sq ft, and even the weakest (Cardiff) is at £22 per sq ft.
Outside the top eight cities sits Sheffield, where – according to Knight Frank – the top rent is £20, rising to £22 per sq ft. And where is Nottingham? £17-£20 per sq ft, depending on who you talk to, which is perhaps why speculative development has not happened.
Yet according to James Keeton, director at JLL, the lack of speculative development is due to a lack of sites, not poor viability. “We know occupiers can pay more, because they do in the other regional cities. The sites haven’t been there in a tight city centre, so no developments have been delivered. Other cities have had better availability of good city centre sites,” he says.
The promoters of the Unity Square scheme, along with the 35-acre Boots Island site, the rest of the Eastside area, and the 106-acre Southern Gateway around the station, may disagree. All have been touted as office development prospects for approaching a decade.
As part of the Eastside project, the Island Business Quarter development has outline planning consent for more than 1.4m sq ft of office space that could become a regional science hub and mop up local office demand, says Victor Ktori, head of Savills’ Nottingham office.
Ktori is talking to potential buyers for a 34-acre slice, in the ownership of Heathcote Holdings. It could see 269,000 sq ft of offices, residential and leisure. “We’re quoting £22 per sq ft, and saying to occupiers we can build whatever you want,” says Ktori. “There’s a severe lack of supply, so it’s only a matter of time before a deal is struck at this level.”
Can Nottingham rents go up far enough and fast enough to float development at Unity Square? Ktori reckons the next 24 months will do it. “The E.ON deal in 2010 had a headline of £19.50, and it won’t take much to push it back up. We’ve got to be patient, and wait for the right scheme in the right place.”
Tim Garratt, managing partner at Innes England, has his doubts. “Never say never, but it will be difficult to get speculative development going in the city centre. Unity is an ambitious scheme in a challenging location. I don’t know if it will ever happen,” he says.
Garratt warns that city council-inspired attempts to build first, and hope rents catch up later, can be risky – as the experience of Derby’s Friargate shows (see p92).
John Proctor says rents must rise – period. “Rents have got to be over £20 per sq ft otherwise the city centre office market will grind to a standstill. It’s simply a benchmark we have to hit,” he says. Quoting rents have yet to be finalised but £22-£23 per sq ft seems likely.
Unity Square
The Sovereign House site of Unity Square has been slated for development since Peel Holdings acquired the freehold of the site in the late 1980s.
In 2006 the car park was expected to see 256 flats, but by 2009 it had changed to 300,000 sq ft of offices along with other uses.
There have been several other changes of plan, some detailed and some more substantial.
Unity Square is said to have narrowly missed out on the 2010 E.ON requirement, which eventually landed on a 105,000 sq ft nine-storey building at the Guildhall, developed by Miller/Birch.
Rents are rising…
If pure speculative development is hard to justify, speculative refurbishment is proving a money spinner.
A 20,000 sq ft letting to Now Pensions, at BMO Real Estate’s 26,300 sq ft 37 Park Row, is being hailed as a sign that city centre rents will soon pass £20 per sq ft.
James Keeton, director at the Nottingham office of JLL, says: “BMO is already looking towards the next refurbishment of two floors, totalling 15,000 sq ft at the adjacent Agora building at Cumberland Place. “Alongside this, CCLA has recently completed the refurbishment of 15,780 sq ft in a single floor at New Castle House, Nottingham. “However it is still some way from meeting the latent demand within the city.”
Joint agents are JLL and FHP.
