■ 2013 represented a real step-change for the UK office markets, with demand increasing across all of the key markets, representing a significant growth in take-up levels, while in many cities, office rents for regional commercial property have returned to growth in 2013. The falling availability of Grade A supply is now a key theme across the regional markets. Overall, Grade A supply has more than halved from its peak in 2009.

■ A survey by the CBI/Accenture found that just over half of the British companies surveyed (51%) expect to create new jobs over the next year - with Yorkshire, Humberside and the East Midlands the regions with the most positive views. This positivity started to translate into office take-up in 2013 and has continued into 2014.

■ With an increase in larger lettings over the second half of 2013, the major regional office markets saw a 32% growth in take-up in 2013 in comparison to 2012 (33% if you include the M25). This is the best year since 2007. Cities which performed particularly strongly were: Leeds, who saw an impressive 97% growth, with a number of large lettings signing through 2013. Cambridge and Glasgow also saw strong growth at 88% and 87% respectively.

■ We expect take-up to end 2014 at 13% above the long-term average. Strong cities to watch are Cardiff with an exceptional 107% increase expected, and Manchester and Birmingham, although more modest, are still predicted to see a 26% and 14% rise in take-up respectively.

■ Larger occupiers, such as PwC, BBC, Addleshaw Goddard and KPMG will still be active in the market as we go through 2014, however, following London’s lead, mid size tenants will become much more active off the back of improving business confidence and a tightening supply pool in this size bracket.

■ Take-up for the first quarter of 2014 is estimated to be 4% up on the same time in 2013, with particularly strong cities being Cardiff with 210% growth and Manchester with a 48% growth.

■ Towards the end of 2012, economic data started to indicate that the level of regional employment had increased in 'office-based' sectors, which has heralded a renewed optimism in the regions. More recently data from CBI and PwC point to a further 15,000 positions hired in the first quarter of 2014, which would be the fastest growth since the study began in 1989.

■ There is also evidence that the regional markets will increasingly benefit from relocations out of London to more affordable locations; a number of footloose requirements have been publicised over the last few years. A good example being Deutsche Bank's, expanding by 1,000 jobs in Birmingham as part of plans to decentralise some of their back and front office functions.

■ Currently, Birmingham's top rents are still 14% down from their peak of 2008, compared to the City of London where rents have already beaten their peak by 17%. Many regional cities are at a point in the cycle where it has the capability to become the 'value for money' alternative to London.

■ We estimate that 20% of available space in our key office markets is Grade A. Within this figure there is even less 'large floorplate' newly built space, and this is the trend that is starting to stimulate a rising interest in speculative office development in the regions.

■ Overall supply has fallen 12% over the last 12 months (14% if you include the M25). Due to a number of larger lettings, Leeds saw the biggest supply fall, with a 31% decline.

■ However, if we are looking solely at Grade A supply, the majority of cities are edging towards a severe supply shortage. Will these cities have the space that growing companies need?

■ From a supply perspective, the continuing erosion of Grade A supply across the region is now likely to trigger enquiries from a number of occupiers, as they become aware of the increasingly limited pool of suitable product. Going forward, there are also a significant proportion of lease events coming up during the next five years, in the key regional markets. This bodes well for a healthy level of future office demand.

■ With limited Grade A floorplates, some of this demand will involve a pre-let. Indeed, occupiers with lease events coming up in the next three years, will need to start looking now to make sure they secure the best deal.

■ Due to shortage of stock, Leeds was one of the first cities to see the return of the pre-let in 2013 and the recent announcement of global pharmaceutical firm, Astra Zeneca, relocating their UK 850,000 sq ft headquarters, establishes Cambridge's position as a leading UK office market.

■ Regional city vacancies are falling, and the development pipeline is only equivalent to 0.8% of stock (Graph 6). With this in mind, regional office locations are now starting to respond to the changing market demands and are at varying stages of seeking to attract office development back in the city centres. The take-up and supply balance looks attractive in key locations such as Manchester, Leeds, Birmingham and Edinburgh, however, office rents need to grow in many Tier 2 locations to make development viable without public sector pump-priming.

■ Given the renewed demand in the regions, against the improving economic conditions, there are great opportunities ahead for those investors and developers with well located sites. Indeed, the growing confidence in regional office markets, with growing demand and limited supply, is a catalyst for developers to act sooner rather than later.

■ Encouragingly, according to Savills PMI survey (Graph 3) the UK total commercial projects rose at the sharpest rate in the survey history during February with growth of private office activity remaining robust.

■ In our last report we reported that 10 schemes are underway in Bristol, Cardiff, Manchester, Edinburgh, Cambridge and Glasgow (c.1 million sq ft in the pipeline outside the South due to complete in 2014/15). Although this figure hasn't changed significantly since the last report, what has changed is the expectation that a number of new schemes will start on site within the next 6 - 12 months.

■ Although availability of funding remains an issue for speculative development, attitudes to funding part pre-lets in the regions has now fully recovered. The percentage needed for a pre-let has also decreased over the last few years, down from 60% at Two Snowhill, Birmingham to Wragges to 24% at St Peter’s Square, Manchester to KPMG.

■ Although London and the South East are likely to lead in terms of job growth, with these areas being dominated by the private sector, key cites such as Manchester and Birmingham will also see substantial growth in the private sector.

■ Which sectors will provide the impetus for growth as we go through 2014?

■ The largest growing sector over the last twelve months was the Professional sector, accounting for around a third of the total jobs growth. Going forward the Professional and administrative services are predicted to be the key driver for growth over the next decade, with a 11% growth forecast in both sectors over the next five years.

■ Employment growth in these sectors will help to negate the job losses expected in manufacturing, and in public services as further austerity measures take hold.

■ Despite an economically challenging few years, we are of the belief that the regional markets are now at a turning point, with the regions being well placed to take advantage of the improving occupational markets, with some locations faring better than others.

■ The sustained levels of occupier demand combined with the decreasing availability of grade A office supply has also been a catalyst for rental growth in the majority of regional office markets. As we go through 2014, as the economic recovery really starts to take shape and new developments provide a step change in rents, we expect rental growth for prime space will continue on an upward curve in the majority of the regional cities.

■ Seven of the UK cities covered are expected to see growth in 2014 (eight if you include the M25) (Graph 8). Savills predicts a notable rise moving forward in Manchester and Edinburgh where rents are likely to see a 7% increase going form £30 per sq ft to £32 per sq ft. Cambridge and the M25 are close behind at 6%, moving from £34 per sq ft to £36 per sq ft and £41 per sq ft to £43.50 per sq ft respectively, over 2014.

■ Away from the prime end of the market, we expect rental growth to remain subdued with high levels of second-hand space still on the market.

■ With supply being a determining factor in this cycle, the lack of development finance will keep supply restricted, however investors should start to move up the risk curve and start backing speculative development in the regions as we move through 2014.

Taken from
Spotlight: Regional Office Market Report - April 2014