Avison Young’s latest Big Nine report reflects impact of COVID on regional office markets

Avison Young’s latest Big Nine report reflects impact of COVID on regional office markets 3 Aug 2020

Analysis of regional office activity in Q2 2020 shows strongest performance in out of town markets.

Total take-up across the Big Nine office markets (Birmingham, Bristol, Cardiff, Edinburgh, Glasgow, Leeds, Liverpool, Manchester and Newcastle) amounted to 329,000 sq ft in the city centre and 447,000 sq ft in the out-of-town markets, 75% and 42% below their respective ten-year quarterly averages.

During the quarter there have been significant practical difficulties in conducting viewings and due diligence with occupiers either delaying or putting their occupational requirements on hold while many have been reassessing their spatial requirements. There has also been an increase in the number of re-gears on both a long-term and short-term flexible basis, as occupiers delay longer term decisions.

Most markets have suffered a sharp dip in demand, although there was some notable activity in the out-of-town markets. In Manchester, Newcastle and Glasgow several circa 30,000 sq ft deals completed, with the latter two cities recording above average take-up.

The public sector was the most active in the city centre markets across Q2, headlined by the Department for Work and Pensions deal for 48,787 sq ft in Birmingham.

The current supply pipeline remains relatively constrained, with 5 million sq ft of offices under construction across the Big Nine city centres, of which half is pre-let. The speculative space available is weighted towards the larger cities, with 36% in Manchester, 23% in Birmingham and 10% in Glasgow.

Headline rents have not been tested yet because of the lack of prime transactions. Anecdotally however there has been an increase in some rent-free periods to compensate for the delays to occupiers. The average of prime rents across the Big Nine cities amounted to £31.61psf. With an average rent-free period of 19.3 months on a ten-year term, this equates to a net effective rent of £27.32 psf.

Occupiers are gradually restarting requirements that were on hold and the number of transactions is likely to increase as the year progresses, with September expected to show a step change in activity, with many companies anticipated to return to the office. However, the level of transactions may not return to normal levels before next year.

Charles Toogood, Principal and Managing Director, National Offices, said:
“The office market is now faced with the dual challenge of a shrinking economy and the structural changes occurring as a result of the pandemic. Occupiers are uncertain over future space needs, with some companies taking the opportunity to conduct a strategic review across their occupational estate.”

The slowdown in investment volumes continued into Q2 with £151 million of transactions across the Big Nine cities, which compares to the quarterly average of £561 million. With only a handful of deals this quarter, the main activity has been from domestic purchasers, while there has been very little activity from overseas buyers.

In the largest deal of the quarter, Tesco Pension Fund agreed to forward-fund Cubex and Fiera Real Estate’s ‘Halo’ offices in Bristol for £70m. There was also a handful of circa £20 million deals in established out-of-town locations. These included the purchase of 2620 Aztec West in Bristol by M7 Real Estate for £21 million and Yorkshire Water buying its office at Livingstone House, Leeds for £20 million. In Newcastle, LCN Capital Partners acquired Cobalt 22 for £18.3 million.

On the MSCI monthly index, regional office equivalent yields stood at 7.34% at the end of June, which compares to 7.08% in March and 7% at the beginning of the year. There is very little evidence of yield movement on prime stock, so the average across the Big Nine remains at 5.33%.

Mark Williams, Principal and Managing Director, Regional Investment, said:
“The post-Covid period will be a challenging time and there will be some pricing adjustments. However, appetite for long income deals remains, with a focus on core and prime assets, albeit they are progressing slowly and there are still limited new deals coming through.”

You can view our latest Big 9 report here.

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