What a difference a year makes: last summer three major developments in central Bristol – two new-builds and a heavy refurbishment – were coming out of the ground.
None of them had any occupiers, but their owners bet, wisely as it turns out, that at least one of the requirements that had been floating around the market for some time would bite.
Even they must have been surprised, though, when in the space of a couple of months at the start of this year not just one, but three tenants decided to make a move that took more than 125,000 sq ft out of the supply pipeline.
This was a victory for a decidedly fickle occupier market, which has seen many names come and go since the city, like others in the UK, began to bounce itself out of recession. But it also has a flip side: three occupiers – KPMG (Skanska’s 66 Queen Square), PwC (Salmon Harvester’s & NFU’s 2 Glass Wharf) and MAPFRE (M&G’s 1 Victoria Street) are no longer looking for space.
Was it this thought that has so far made developers hold off from going ahead with further new speculative construction? CBRE senior director Philip Morton does not think so: “The point is that the take-up all happened at once and that was unexpected. Developers that got their fingers badly burned in 2007 are still around and they have long memories.
“But with rents higher now the yield appraisals are much better, so I think we will see two or three schemes come forward in the next couple of years.”
It may be much sooner. Perhaps buoyed by the spurt of recent letting activity, it appears that two of the five developments touted as most likely to be built may go head-to-head as speculative construction starts.
At Aspire, Morton, who is letting agent, says demolition will start this month, and construction will begin in early 2016. By that time, assuming it has consent, Cubex’s office block at Finzels Reach (for which a planning application went in last month) may also have started coming out of the ground, according to Cubex director Gavin Bridge.
Although there are no major lease events due in the second half of 2017, when the Aspire and Finzels Reach schemes may be ready for occupation, developers are aware that options for tenants wanting large amounts of space are limited.
“A requirement for anything above 70,000 sq ft will have to take a prelet,” reckons Richard Kidd, director at Bilfinger GVA.
He should know: he is advising an unnamed client who is searching for between 80,000 and 120,000 sq ft over the next three to five years. This is just one of approximately five live requirements of between 50,000 and 100,000 sq ft, including AXA, which is reported to be seeking around 60,000 sq ft.
However, the focus on brand new space may be misplaced, according Origin 3 director Peter White. He says: “Secondhand space is where a lot of activity could happen. Grade-B rents are coming back to over £20 per sq ft so that type of space is one to watch over the next 12 months.”
Prime rents are also rising and as the amount of new space shrinks agents are daring to dream of levels breaching £30 per sq ft by early next year, widening the gap between central Bristol and north Bristol (see box, top right). At the same time, incentives are coming in fast, to less than 12 months on a five-year lease.
For both developers and tenants, the second half of this year will definitely be crunch time.
Out-of-town prospects
Bristol’s property commentators are divided over the recovery prospects for out-of-town offices. While there is consensus that north Bristol was badly hit during the recession, some doubt its ability to bounce back over the next couple of years.
Ian Wills, director at JLL, is not one of them. He says: “As an illustration of how the out-of-town market has changed, look at the statistics for Aztec West. In mid-2012 there was 260,000 sq ft of vacant space. Three years later availability stands at 140,000 sq ft.”
Admittedly, Wills is letting agent on 740 Aztec West, a 50,000 sq ft building speculatively refurbished by Legal & General. But with most of the space snapped up last autumn by Alcatel-Lucent and the remainder under offer, it is not hard to see why others, like Hartnell Taylor Cook partner Chris Grazier, say that demand is returning.
He says: “People have written off business parks to a certain extent, but when you look at Bristol it is still predominantly a rural catchment so business park space is important.”
The arguments in favour of more activity at Aztec in the second half of the year are convincing. Some buildings date back two decades, or more. The question is whether owners will refurbish or redevelop. “There is a gap in the market. The existing development sites need to be prised out by people who can develop speculatively,” says Alder King partner Simon Price.
But plenty of Bristol voices suggest the numbers simply do not stack up for redevelopment and are not expecting to see that change until next year at the earliest. If that is true, the yawning rental gap between the city and north Bristol – £28.50 v £19.50 per sq ft respectively – is unlikely to narrow in the near future.
What future for refurbs?
First the good news. Warren Reid, who is head of commercial property at law firm Thrings and advises corporate occupiers, says that brand new buildings are not always what his clients want.
“Refurbished space is in demand as long as it is good quality,” he reports. One of last year’s star lettings – all 47,000 sq ft of M&G Real Estate’s 1 Victoria Street, which was taken when Spanish firm MAPFRE moved several parts of its UK business under one roof from outside Bristol – is testimony to the fact.
Now the not-so-good news. There is no secret stash of tired offices in central Bristol, letting at £10 per sq ft or less, waiting to be turned into the sophisticated offices modern occupiers require.
“There isn’t a single building with a decent volume of space,” says Hartnell Taylor Cook partner Chris Grazier. One of the largest contenders is AEW’s 32,000 sq ft Freshford House and WCA House on Redcliffe Way, due to become vacant when OFSTED moves out next month, although no plans have been confirmed for the properties.
A huge amount of office space has been lost to other uses due to permitted development rights. Research by Lambert Smith Hampton this year revealed that 800,000 sq ft was zapped from Bristol’s office stock over the past two years, the most of any UK city.
But Philip Morton, senior director of CBRE says: “Because of the turnaround in office values, some buildings are likely to return as office stock. If yields come in any more they will be worth more as offices than residential.”
