With take-up rising and availability falling, the outlook for Glasgow would seem to be positive, although agents are still cautious. Anita Howarth weighs up the statistics.
Glasgow may have a reputation for rain, but in the office sector at least the cloud that has been overhanging the market appears to be lifting – albeit more slowly than expected. On the face of it, figures produced by Richard Ellis are encouraging. Take-up has risen 32%, total availability is down 18% (see box) and even secondhand space is shifting. Richard Ellis’ Craig Ritchie points to a reduction in available secondhand space from 993,000 sq ft (92,250m2) in June 1994 to 761,000 sq ft (70,697m2) in June 1995. He claims that much of this is indigenous growth; smaller or medium-sized firms are more likely to take secondhand space, if only for extra room.
Richard Ellis research also suggests that the financial sector is an important player, accounting for 68% of total identified take-up. Medium to large professional firms accounted for 16% of total take-up in the first six months of 1995, surpassing the sector’s performance for the whole of 1994.
While these figures appear to be positive Jones Lang Wootton’s Phil Reid is unimpressed: “It is a changing market, but take-up, rental growth and new development are slower than anticipated.”
The next few months may give Reid greater cause for optimism, when a number of long-term requirements, which are currently in negotiations, sign up. Kellock wants 10,000 sq ft (929m2); Burns Stewart is rumoured to be taking a prelet on 7,000 sq ft (650m2) at 198 West George Street; Barclays has a 40,000 sq ft (3,716m2) requirement; and a client of Allan Associates is also believed to be close to signing up for 40,000 sq ft (3,716m2).
However, as in many cities across the UK, occupiers are finding it difficult to get out of existing leases, particularly on premises of less than 20,000 sq ft (1,858m2). Colliers Erdman Lewis Shauneen Kelly explains: “They are very often faced with trying to assign leases where the existing rent is higher than estimated rental value and they are on a long-term lease. Because they do not want a double overhead they are stuck.” And as supply reduces, landlords are increasingly unwilling to offer the incentives that have been used to cover a second lease commitment.
Lack of product could also hinder improvement. Ryden’s Ewan Cameron argues: “The existing supply of good-quality space which has been hanging over the market is now materially dissipated to the extent that there are no new self-contained buildings of more than 50,000 sq ft (4,645m2) presently available and such larger space options are contained within only two buildings: Tay House and the recently completed Scottish Life House in St Vincent Street.” Even this situation could change quickly as Tay House is letting up, with two 20,000 sq ft (1,858m2) deals in the past six months (see key transactions) and a further 30,000 sq ft (2,787m2) currently under offer.
On a slightly smaller scale, 227 West George Street is the only completed newbuild able to offer 30,850 sq ft (2,866m2) in self-contained units. The joint agents are Ryden and Richard Ellis. And at 131 St Vincent Street, 22,564 sq ft (2,096m2) is being built behind a partly retained facade. Conrad Ritblat Sinclair Goldsmith and Ryden are letting agents. Chesterton’s Sinclair Browne argues that the shortage of good-quality space is slowing down the market: “There is not a great deal of product on the market, so you have a double-edged equation; if product was available, space would let. There is very little good space, so lettings are limited.”
Most new developments are in the prime core, with the exception of the two largest schemes – Friends’ Provident’s 90,000 sq ft (8,361m2) in Waterloo Street and Pillar’s Atlantic Quay at Broomielaw, which are both slightly off pitch. This is because the prime core is limited by a grid street pattern and conservation issues. DTZ Debenham Thorpe’s Bill Colville says: “Scot Am has one of the last opportunities to build a really big scheme in the city centre. Then developers will have to look at Cadogan and Broomielaw if they want larger schemes with larger floorplates.” Scottish Amicable’s 77,000 sq ft (7,153m2) speculative development at 181-195 West George Street is due for completion in November 1996.
However, Hillier Parker’s Keith Aitken argues that there is limited demand from large space users because, in his opinion, Glasgow’s geographical position is too remote for major national headquarters: “Glasgow would do well to concentrate on what it does well – attracting smaller regional offices or call-centre-type operations.”
If this is the case, it will be interesting to see how long the second phase of Atlantic Quay in Broomielaw will take to let. Ken Campbell of Knight Frank & Rutley, letting agent on the scheme, is optimistic, pointing out that all but 20,000 sq ft (1,858m2) of the 288,000 sq ft (26,755m2) first phase has been let. He argues that it benefits from being five minutes from the city centre, while offering the large floorplates and generous car parking that the prime core cannot offer. Phase one attracted TSB into 77,000 sq ft (7,153m2) and BAe into 120,000 sq ft (11,148m2). Developers Pillar Properties and Bellhouse Joseph hope to start the second phase later this year.
According to Douglas Smith of CEL, development momentum is picking up. He estimates that 250,000 sq ft (23,225m2) of high-quality office accommodation will come on stream in Glasgow within the next two years, with 40% outside the prime area. But Ritchie argues that some of these developments need to be brought forward if the letting momentum is not to be lost.
In most centres in the UK, development has been held back by difficulties in getting funding. According to Grimley’s Bill Binnie, this has not been the case in Glasgow: “Most of the big schemes are owner-occupied and amount to a redevelopment of their own sites, as was the case at 227 West George Street. So larger schemes are being developed through internal funding.”
Another prominent feature of Glasgow’s development scenario is the emphasis on utility, rather than grandeur. According to Aitken: “Occupiers do not want opulent entrance halls and atriums. They want something functional and efficient. They are questioning the need for air-conditioning. And the effect of this debate is that developers are holding back on specification because they will not get inflated rents for it.”
As it is, rents have been slow to move, with a number of incentives obscuring net rents achieved. Agents are looking to the recently completed 227 West George Street as a “litmus test” for the market.
Irrespective of the top rent set there, Reid argues: “A market structure problem looms as developers with new product seek 15-year-plus leases while tenants seek sub-10-year break option flexibility.”
Lack of rental movement is affecting investment. There is a feeling among agents that rents are artificially low, while good investment product is in short supply. According to Binnie: “There have been five or six major investment deals during the past 12 months, but they have tended to be for poor-quality, multi-tenanted space. There has not been any prime investment sold over the past year – funds are holding on to what they have got. And there is an increasing gap between prime and secondary buildings. Funds are not sufficiently discerning about prospects for rental growth.”
Another factor that could hold back rents is the introduction of rates on empty buildings. The argument is that developers may be prepared to be flexible on rents rather than have an empty building. This would especially be the case on buildings completed this year as empty building rates were probably not taken into account in the costing process. However, Smith argues that the full impact of rates on empty buildings has yet to be established: “It must have a material effect on the owners of empty offices unless relief is available to them, for example, if the building is listed. It may further discourage developers from considering speculative projects unless they are in a position to make allowances for this in their cost assessment.”
