Steady as she goes

Southampton does not suffer the peaks and troughs of the Thames Valley office market, but the city still has problems. Noella Pio Kivlehan reports Being unfashionable can be a good thing, as Southampton has discovered. During the late 1990s TMT boom, the south coast city looked with envy at the Thames Valley as the region’s office market boomed. Insatiable occupier demand drove rents to more than £30 per sq ft. In contrast, Southampton’s office market plodded along without drama. Rents were static, occasionally passing £20 per sq ft. But the city has seen its own problems, namely lack of development land and strong residential market. When compared with the Thames Valley today, however, Southampton has been fortunate. With the much documented dot.com crash and economic slowdown, Thames Valley in-town rents have dropped to £24 per sq ft, while vacant stock in nearby Basingstoke alone amounts to almost 1m sq ft. Southampton, meanwhile, has only 600,000 sq ft of offices available, including out-of-town stock, prime rents have hit £21.50 per sq ft and take-up last year was more than 280,000 sq ft. The city can thank the mixture of occupiers it attracts for its long-term stability. King Sturge’s South Coast Metropole 2003 report states: “Office take-up is spread across diverse sectors, which cushions the downturn in any one sector of the office market. This is a healthy base for long-term sustainable growth in the regional office market. “Our mix of occupier has generally sheltered us from the worst of the economic recession,” says Ian Hillman, director at Austin Adams. But, as with everything good, there comes something bad. Taking risks While Southampton does not share the difficulties of the Thames Valley market, its mixture of occupiers causes its own problems. As King Sturge’s report points out, developers are reluctant to take risks building in a mixed occupier market as they do not know which sector will hit the boom time. In Southampton’s case, the out-of-town market is doing well speculatively. And Prudential is developing phase III of Forum Three at Solent Business Park. On a smaller scale, 8,000 sq ft is being developed at Mill Yard, at junction 3 of the M27. And the market is still basking in the 150,000 sq ft letting to National Air Traffic Services at the Solent Business Park last year. But in town it is a different story. For a city with around 220,000 people and 80 minutes by train from London, there is only one in-town speculative development under construction – Imperial Square’s 14,000 sq ft building at King’s Way. Fickle occupiers Added to the lack of speculative build, the city’s supply of grade A stock is low. There is only 150,000 sq ft available, which includes Botleigh Grange, and Stoneham Park on junction 5 of the M27. In town, the only building available is the 50,000 sq ft Mountbatten House on Grosvenor Square. But occupiers are fickle and they wantnew stock. “Mountbatten House is over 10 years old and solicitors that locate to Southampton want their own front doors- they want to make a statement,” saysNik Cox, partner at King Sturge. Even when deals are done, it is still not a catalyst for new-build. Last year’s lettings to Skandia Life and solicitors Bond Pearce did not jolt the market. Skandia Life took a further 20,000 sq ft at Skandia House, Commercial Road, and Bond Pearce took a prelet of 41,000 sq ft at Oceana House on the same road. “These significant lettings have not triggered substantial further development in the city,” says James Prowse, associate director at Chesterton. “There is still potential pent-up demand and opportunity for rental growth.” For example, an unnamed firm of lawyers is scouting the city for a 40,000 sq ft building. Jeff Walters, economic development manager at Southampton city council, blames the lack of speculative build on the city’s image. “There’s a sentiment in Southampton that we are not confident enough about our city without a prelet market. Part of the belief is that Southampton is a very local market and is only driven by the big regional solicitors. “Add these reasons to the competition from the M27 corridor, and you have developers who are scared.” Image is not the only problem. Southampton has a lack of space for office development. Andrew Archibald, senior associate at Humberts, says the insatiable demand for residential property is swallowing up many of the city’s older commercial buildings, creating shortages of supply. “While extensive conversion to residential is good in terms of regeneration, it is making new commercial development opportunities scarce as they cannot compete on land value,” says Archibald. He adds that the problem is being compounded by the government’s drive to use brownfield land for residential redevelopment. But Irene Spencer, a partner atVail Williams, disagrees with Archibald. “Those buildings that have gone over to residential were not commercially viable for offices,” she says. Whoever is right, King Sturge’s Cox questions why the council is letting so much residential development happen. “I would think it was down to the council to regulate. I know it’s a free market economy and I know people are trying to promote city living, but you shouldn’t forsake developments that create jobs. Long term residential building could affect employment in the area,” he says. In reply, Walters says the council would welcome any planning applications from developers looking to build office buildings. But, adds Walters, the strong residential market is more attractive to developers. Proving his point, Walters says there are several schemes around Southampton that have planning permission for offices but have never been built. Among those with permission are 200,000 sq ft at Mayflower Plaza, which has had permission for more than a decade, 21,000 sq ft at Dorset Point, and 16,000 sq ft at Charlotte Place. Future development And there are more schemes either adding to the potential office stockpile or in the process of construction. For example, 32,000 sq ft is being proposed at the Royal Pier waterfront development, on a site adjacent to offices on Town Quay. Cox believes the 50,000 sq ft Axa building at Cumberland Place “is prime for a developer to come along and build a nice shiny office”. Optimists might say it could be worse in Southampton. It might not have seen the boom times witnessed by the Thames Valley, but equally it has not seen the slump. Winchester office update Occupiers face lack a of choice According to David Rowthorn of local agents Palmer Fry, the Winchester office market has continued to be “extremely lively with eager take-up and limited supply, with many potential takers unable to find suitable properties.” Total supply is only around 60,000 sq ft (including 20,000 sq ft occupying a site earmarked for a new shopping precinct), of the total stock of approximately 1m sq ft. “The lack of choice faced by occupiers seems likely to continue, with the ‘double whammy’ of the planning authority’s resistance to further office development, and numerous examples of office buildings being converted for residential use on the back of the city’s soaring residential values. “One does not have to travel very far north to find a totally different situation, with huge availability in Basingstoke and within the M25,” says Rowthorn. Take-up of space during the past year has been around 56,500 sq ft, and rents achieved have generally been in the £14 to £17 per sq ft bracket. Freeholds have been unobtainable. Rowthorn adds that one of the larger offices to have changed hands in the past few weeks is Fiennes House in Southgate Street, a four-storey refurbished building. The offices were taken by stockbroker, Rathbone Bros. Southampton new/modern office availability M27 corridor, April 2003 Southampton’s office market has reached a stalemate as developers turn to the more lucrative residential market. There is only one in-town speculative office building being constructed in Southampton – the 14,000 sq ft Kings Park Road – and there are no immediate plans for any more. Out of town, Solent Business Park will see nearly 400,000 sq ft developed in just one scheme, plus several smaller speculative schemes, such as the 8,000 sq ft Mill Yard, developed at junction three of the M27 Property Floor area (sq ft) Description Asking terms Asking rent, £ Sites Phase II, Skandia Point, Southampton 32,615 Proposed, six-storey office building with parking Not Quoting n/a Centris, Leigh Road, Eastleigh 62,162 Proposed office development (prelet only). Four-storey, air-conditioned To let on new leases for terms to be agreed n/a Forum 2-12, The Forum, Solent Business Park 398,000 Proposed office development in 10 units Not quoting n/a Mayflower Plaza, Commercial Road, Soton 100,000-200,000 Prestige city-centre HQ with underground car park New FRI lease TBC Under Construction 18-21 Kings Park Road, Southampton 14,000 Speculative office scheme due for completion in June. Possibility of combining buildings to total 39,000 sq ft To let on a new FRI lease 21.00 Forum Three, The Forum, Solent Business Park 48,590 New speculative office building under construction. Completion in May Not quoting TBC New and Available Gurnard House & Fishbourne House, 1400 & 1500 ParkwaySolent Business Park 11,000 each New speculative development under construction. Completed last September To let on new FRI leases 20.00 Burlington House, Botleigh Grange, Hedge End 31,000 New speculative development air-conditioned office building. could be sub-divided To let on new FRI leases 19.50 Chilworth Point, Southampton 8,568 Two-storey office development To let on new FRI leases n/a Secondhand 1st and 2nd Floor, Forum One, Solent Business Park 43,022 New air-conditioned offices To let on a new sublease 21.00 Stoneham Park, Eastleigh 35,285 Campus-style conversion with ground-floor modern office split over three buildings. £330,000 Stoneham Place Rectory £380,000 Stoneham Gate n/a Mountbatten House, Grosvenor Square, Southampton 50,000 Late 1980s air-conditioned offices spread over several floors of multi-occupied building Seeking to assign whole. Could sublet in parts. Released by Skandia 17.50 1560 Parkway, (Tishmans) Solent Business Park 17,671 Modern three-storey offices with raised floors. Air conditioning being installed To let on new FRI lease 16.50 3600 Parkway (UBS) Solent Business Park 26,000 Modern air-conditioned offices on ground and two upper floors To let on new FRI lease 15.25 3700 Parkway (UBS) Solent Business Park 8,297 Modern first-floor offices. Air-conditioned and raised floors Held on a lease expiring 25 December 2005 14.00 Matrix House, Southampton 1,700-9,727 Modern air conditioned offices. Available on a floor-by-floor basis. New FRI lease 12.50 Grosvenor House, Southampton 1,100-40,000 Modern open plan offices. Needs refurbishment. Sublease expiring 2004 12.00 36-38 The Avenue, Southampton 2,303-5,920 Prominent interlinked offices. Assignment or subletting of lease expiring June 2005 n/a Friends Provident Stadium, Britannia Road 8,720 New offices built as part of Southampton Football Club New FRI lease 14.00 Capital House, 1st, 2nd, 5th & 8th floors, Southampton 1,400-15,300 Landmark building in need of minor refurbishment New leases to be agreed 12.00 Wootton House, 1300 Parkway, Solent Business Park 17,621 Modern air-conditioned office TBC 18.00 Source: King Sturge