Southampton’s office market is at a crossroads. Supply is decreasing, the result partly of a raft of permitted development rights. But the city centre take-up figures are yet to show concrete signs of a post-recession bounce.
Rents don’t support new development, which means there is a lack of quality stock to entice potential occupiers, and the leap in rents an occupier would have to pay for a prelet, based on present levels, might be too great.
Where does Southampton’s office market go from here? Take-up in the city centre for the third quarter was 54,000 sq ft, according to Savills, and it is likely that take-up for the whole year will be less than 100,000 sq ft for the fifth year in a row, says the firm’s head of offices, Martin Hastelow.
Permitted development rights have kept agents busy; the council has received 13 applications since the new rules came into force in May 2013. If all come to fruition it will reduce overall supply by nearly 135,000 sq ft. Indeed, total available stock has dropped by 15% in the past 18 months.
However, the problem is that there is little or no new stock coming along to replace the old. James Brounger, managing director of the south central region at CBRE, says what is termed grade-A space amounts to 93,000 sq ft in the city centre. But he qualifies that figure by saying that only one building, Charlotte Place, has not actually been previously occupied and that has just 11,000 sq ft of space left.
There are sites ready and available to develop if a prelet can be secured. For example, Cumberland Development owns a site on Cumberland Place on which it hopes to build The Bond, a 150,000 sq ft office building (below).
Similarly, Development Securities is hoping to create a seven-storey office block named Aqua (above), which will provide an additional 60,000 sq ft of space as part of the West Quay phase 3 developments.
Orestis Tzortzoglou, Development Securities’ project manager for the Aqua scheme, says: “Our immediate focus is on occupiers already in and around Southampton. We are in early discussions with a handful of tenants who are either in the market for space or have lease events in the next three to four years, some of whom may stay put while others will be looking to move.”
But occupiers would have to pay much higher rents if they wanted brand-new space. Jason Webb, director at Hellier Langston, says: “The best achieved rent in the area is £19 per sq ft. To get something out of the ground in the city centre, you’re going to need something in the mid-20s. That’s a 20% hike in achieved rentals just to get a letting on a design and build. That’s quite a jump.”
Furthermore, it will take a big requirement to kickstart these large developments; typically half a building would need to be leased to anchor a project, at a time when big deals have been thin on the ground.
Southampton, like many other UK cities, has seen occupiers renegotiate leases during the recession, but agents are hopeful that the improving economy could give companies the confidence to move. However, as Webb says: “Just playing musical chairs with office occupiers doesn’t really create a market.”
Hastelow says there is some evidence of an improving market and points to the increasing size of deals, albeit from a low base. Previously agents were struggling to secure deals over 5,000 sq ft but Hastelow says there have been a few more deals around the 10,000 sq ft mark.
He says: “We are going to have 12 months, possibly two years, with little attractive office stock, which should start pushing rents up and making the place more attractive to developers.”
Indeed Savills is already tentatively raising rents on Charlotte Place. The office block, completed in 2008, was the last speculative build in the city centre and is the only central office building under 10 years old. “We’re upping the price on the remaining space at Charlotte Place from £15 to £16.50 per sq ft because we think there is a shortage of supply,” says Hastelow.
Brounger agrees that the shortage of stock will put upward pressure on rents. He says: “There will be a re-education of the occupier market. Rental deals will be different for new occupiers compared with existing buildings, but the existing buildings aren’t available to them anyway.”
He is also hopeful that Southampton can follow the trend of increasing prelet activity seen in cities such as Manchester and Birmingham. “It’s fair to say we’re not as far down on the demand and supply curve as those cities have reached,” he says, “but one can anticipate a point in the relatively near future where we get there.”
Nonetheless, it is a big ask against current market conditions. Will refurbishment plug the gap incrementally, pushing up rents and improving confidence into the market?
Possibly, but not to any degree. The problem again is stock. Gateway House, just outside the city, has recently been refurbished, but there is nothing else under way.
“Things may come up but it depends on what existing tenants do,” says Brounger. “If they relocate, then there may be an opportunity.”
The market is keeping a close eye on 2 Grosvenor Square which Aviva has recently vacated. Its lease doesn’t officially run out for another 12 months but the building could be a prime refurbishment opportunity.
Again it is a catch 22. “If stock of the right quality was available, we would quickly push up the rents. Demand is reasonable and is better than it has been,” says Brounger.
If the agents are right then the road Southampton’s office market travels depends on who is the first to produce a chunk of reasonable quality office stock.
Undergoing improvements
Several projects are under way to improve Southampton city centre’s attractiveness to office developers and occupiers alike.
Southampton city council’s new Labour administration has pledged to invest £40m in the city’s roads over the next 10 years. This will include £9m on Platform Road and Central Bridge, two main roads in the city centre. Work is already under way to improve the area around the train station with the aim of enhancing the entrance to the city. Pedestrian, taxi and bus links are also planned.
A number of culture and leisure developments are also mooted that could raise the city’s profile, including Hammerson’s £70m Watermark WestQuay development. Development Securities has an office development proposed as part of West Quay phase 3 (see main text). Orestis Tzortzoglou, Development Securities’ project manager, says: “We anticipate that the development of the West Quay Leisure Quarter brought forward by Hammerson will help to create some momentum for this part of the City.”
It is all part of Southampton council’s city centre masterplan, which includes 1.2m sq ft of new office stock by 2026.
