With just one new office scheme in the Birmingham city centre office pipeline, one might expect the default reaction among agents to be one of mild panic. Perhaps taking a lead from the famous wartime poster, they have instead opted to Keep Calm and Carry On.
This Churchillian indefatigability has been brought on by a couple of factors.
First, a renewed sense of purpose has arisen from the acceptance that a lack of available funding means that giant speculative schemes are a thing of the past, and attention must instead switch to securing prelets.
Second, the availability of around 700,000 sq ft of existing grade-A stock is providing a useful cushion for any near-term requirements that may arise.
“If we were in a position where there were no readily available buildings and limited stock going forward, then there would be a problem. But the city has filled its boots with grade-A space in recent years,” says John Griffiths, director at GBR Phoenix Beard.
“It will be a few years before we see any speculative office schemes but I’m not sure that’s a bad thing,” adds Philippa Pickavance, head of agency at Drivers Jonas Deloitte in Birmingham. “With a significant amount of existing space available, the question is whether we really need additional new space.”
Buildings that are available include Standard Life Investments’ 45 Church Street, where several lower floors in the 10,000 sq ft bracket remain vacant. At Carlyle Group’s Colmore Plaza, around 210,000 sq ft is available, The Cube at the Mailbox offers 68,000 sq ft and BT’s space at 5 Brindleyplace is due to come back to the market in mid-2012, providing 130,000 sq ft.
Inward investment
Griffiths believes that this level of availability should not present a problem, and could in fact be of benefit to Birmingham in attracting inward investment. “Larger potential inward investors may end up with prelets, but they won’t look in the first place if you have nothing to offer them,” he says.
David Tonks, director at DTZ, says: “There’s a happy balance at the moment – there are choices and there are sustained requirements from occupiers. Nobody feels like they are pressurised.”
Still, at some point the existing supply will begin to diminish and that pressure may begin to increase.
“The big question is what happens as we see the existing supply eroded,” says Jonathan Fear, director at Jones Lang LaSalle. “Once you get down to it, there aren’t that many buildings that can deliver even 50,000 sq ft on a decent set of floorplates.”
The only new development in the pipeline is Irish developer Ballymore’s and US real estate giant Hines’ 305,000 sq ft Two Snowhill. In April, the two parties signed an agreement to jointly develop the scheme.
Law firm Wragge & Co will occupy 185,000 sq ft – less than the 250,000 sq ft that was announced when the prelet was signed in 2008 – with the remaining 120,000 sq ft completing in early 2013.
Craig Satchwell, director at Colliers International, which is advising Hines, says the timing is good since he expects much of Birmingham’s existing available space to have been let by then.
“By the end of 2012, we expect the market to be in equilibrium, with around a year’s supply remaining from the existing stock,” he says. “The building is one of the first out of the stalls for construction in regional cities. There’s no other speculative development happening in Birmingham, so that’s important.”
Prelets needed
Elsewhere in the city, the pipeline is empty. Nobody expects speculative starts, meaning that prelets will be needed.
As Ian Martin, regional head of corporate real estate at Lloyds Banking Group, points out: “Development funding is now easier to obtain, albeit with demanding criteria. On the whole, around 60% of development cost is possible. This funding is likely to require a prelet to a good covenant for at least the majority of space, covering around 150% of the interest costs.”
The newest development opportunity is 55 Colmore Row, which is to be vacated by Wragge & Co. Landlord Aegon has brought in developer Abstract Land to weigh up the options, and the latter will act as development manager on any future scheme.
Since Wragge’s lease does not expire until 2017, the landlord is in no desperate rush to proceed, although Abstract Land may perceive a window of opportunity and push for delivery before that time.
Focus for development
Elsewhere, agents point to the sites in Birmingham’s Big City Plan – such as Miller Developments’ and Bridgehouse Capital’s Arena Central, alongside Argent’s Paradise Circus – as the most likely focus for development.
There is little chance of sites without some existing form of funding or planning permission becoming available in the short term. This is mainly because the time taken to bring them to fruition would cause the first wave of occupier demand to be missed.
Instead, the likelihood is that the owners of already identified sites will be in the strongest position, and they are working behind the scenes in order to enable delivery as the market starts to turn.
Ian Stringer, regional director at GVA, says: “Developers are working to put themselves into a position to start, either submitting new applications or adjusting current ones.
“They are getting themselves as ready as they can to convince occupiers that they are ready to go and have the wherewithal to finance it.”
Tonks adds: “The next sizeable prelet will unlock the next scheme.”
No easy ride
That is not to say that developers can expect an easy ride. As Martin points out: “Standing stock is likely to be offered on very competitive and flexible lease terms. Only the most exacting occupier is likely to run the prelet route rather than compromise to take advantage of good deals.”
Agents suggest that rental incentives will soon start to fall from their current level of up to three years on a 10-year lease, while rents could slowly start to increase from next year.
“If the choice of flexible options is limited and incentives are coming down, you can see the tone of the market beginning to change,” says Griffiths. “Speculative development will only start to return when there is confidence that £30 per sq ft can be readily achieved in the central business district.”
DTZ records rents of £28 per sq ft for this year. By common consent, the Birmingham office market is in reasonable shape.
While the overhang of new buildings could have been interpreted as a problem, most agents believe that take-up will be sufficient to lead to a correction by the end of next year.
From there, limited stock means that rents are likely to rise and new development will increasingly be in demand.
But this positive prognosis depends on a number of significant deals materialising during the next 12 months. If they fail to land, then agents and developers may find their calm demeanours becoming increasingly tested.
Occupiers on the lookout
A range of occupiers is hunting space in central Birmingham, and confidence is high that at least a couple of big deals could be in the offing before long.
Most activity is being driven by lease events. HSBC has hired CB Richard Ellis to review its Birmingham portfolio on a continuing basis and has some lease expiries looming, although it has no official requirement outstanding at present. Another financial occupier, Deutsche Bank, has leases expiring in 2014-15 and could be seeking around 80,000 sq ft.
Other financial services firms, including Lloyds and PwC, are also said to have lease-driven requirements that are likely to come to fruition in the middle part of the decade. Grant Thornton, RSN Tenon, AIG and Chartis Bank are other named requirements.
Among the first of the big occupiers to move could be the Law Society, which is rumoured to be looking at Nurton Developments’ 2 Colmore Square for a requirement of as much as 60,000 sq ft.
Additionally, Microsoft subsidiary Rare – which makes Kinect Sports for the Xbox 360 games platform – is searching for around 40,000 sq ft. However, the occupier, currently based in Digbeth, has pushed the requirement back until at least mid-2012.
It is believed to favour refurbishment or conversion of an existing building.
