Lambert Smith Hampton (LSH) National Office Market Report predicts that it will be 2013 before rents for commercial office space will show any growth. At that point pressure on supply chain could prompt rental growth. Until then, rental growth will be limited to Central London and parts of the South.
Availability levels have stayed high in the Midlands, although prime commercial office space continues to be limited and most availability is of lower grade stock. With the continual low level of market activity, availability has crept up and is close to the market highs of 2009.
The LSH report also confirms doubts that the region will face a lack of grade A commercial office space in the coming years as demand exceeds supply. In Birmingham there is only 300,000 sq ft of commercial office space available, but both the city centre and out of town markets are awash with secondary and tertiary space.
Prime rents in Birmingham have dropped by some 15 per cent during the downturn, while holding up in Nottingham and Leicester. Yet rents for non-prime commercial office space outside Birmingham have fallen due to depressed market conditions.
Providing there is a general improvement in market conditions, lease incentives, which amount to between two and three years rent free on a 10 year lease, ought to start to reduce next year.
Agency Director, Alastair McChesney in the Birmingham office of LSH, said: “The office sector in the region has undoubtedly felt the impact of difficult market conditions over the last two years. We’ve seen a limited appetite for speculative development, regeneration schemes stalling due to lack of investor confidence and public sector grant support, and an abundance of vacated second-hand stock. While take-up of office stock has fallen short of the long term average, supply has remained relatively stable, yet has been largely second-hand space.”
Meanwhile the commercial office sector has continued to attract the highest volumes of investment, followed by retail and industrial. The commercial office sector has represented 42 per cent of total investment in the year to date. The key driver behind this has been the money flowing into the Central London commercial office market, which has accounted for 78 per cent or £7.4bn of total investment into the commercial office sector during the nine months of the year.
Investors continued to target commercial offices in London as prices have shown a significant recovery following their substantial decline during the global financial crisis. Given the peak-to-trough fall in capital values of 44 per cent from 2007 to 2009 and the subsequent recovery of 35 per cent, values signify a 23 per cent discount to the peak of the market in 2007.
Looking outside of Central London it is evident that the majority of deals have been done in the South East commercial office market. The South East overall is the first market investors turn to, as they begin to look outside Central London, and this has been the case this year.
