■ The pace of change in the regional office market has continued into 2014 following the record take-up last year. The second half of 2013 saw a marked change in sentiment within the regional office markets, which has started to reflect in the take-up figures. We expect year end figures to be broadly in line with 2013.

■ Deloitte UK’s latest Survey of Chief Financial Officers found that the top corporate priority is now expansion. A record 72% of respondents believe this is a good time to take risk on hiring, which is positive news for commercial property.

■ Take-up in the first half of 2014 was 22% up on the same time in 2013 and we expect take-up to end the year at 2% above 2013 levels (3% including M25).

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■ After Leeds, Glasgow and Cambridge stole the limelight in terms of take-up in 2013, key cities to watch in 2014, will be Manchester and Cardiff, who are likely to see a 38% and 69% increase respectively on the previous year.

■ Demand in Manchester reached its highest quarterly level for 14 quarters in Q2 2014. Restored confidence and positive market sentiment has resulted in a considerable spike in demand that is likely to see take-up reach 1.2 million sq ft by year end, 45% up on the long term annual average.

■ Cardiff take-up at half year was an impressive 102% up on the same time in 2013. We expect take-up to end the year at c.500,000 sq ft. This is 69% up on the same time last year and 16% above the five-year average.

■ The M25 office market take-up was in line with the long-term trend for the first half of 2014. However, there are numerous requirements and space currently ‘under offer’ is much higher. Therefore, we expect the remainder of the year will see an increase in take-up levels.

■ Going forward, job creation in the UK will be concentrated in the private services sector, particularly the strongly expanding professional and support business services. Both these two sectors alone are forecast to create an additional 1.1 million jobs in the UK by 2024. We anticipate UK wide activity also points to additional and increasing demand from sectors such as Telecoms, Media and Technology sector (TMT).

■ According to Oxford Economics over the last 12 months, Yorkshire and the Humber enjoyed the highest rate of growth across all 12 UK regions in the professional services sector, with growth of 13%, equating to 37,000 additional jobs. This will translate into a steady recovery in take-up to above average annual levels over the period 2014-2018 (though Grade A take-up could be held back by lack of new stock in 2015/16).

■ Attracting inward investment plays a crucial role in the economy of any regional city; Deutsche Bank set a trend of large scale inward investment into Birmingham back in 2013, with the city now seeing HS2, taking 90,000 sq ft at Two Snowhill. We expect this will lead to further speculative development in the city.

■ Manchester has seen a number of in-movers this year, however, one of the most significant deals of 2014 is the letting of 60,000 sq ft at ASK Developments’ First Street to Trader Media. This deal really sets the tone for future inward investment, which should enhance the case for developers and funds to speculatively build in Manchester city centre.

■ Development activity in the regions is now starting to accelerate. While London remains a key focus, the regions offer attractive development opportunities. This is beginning to filter through to the office pipeline figures, with the speculative development pipeline currently 42% up on where it was six months previously. However, it is still 72% down on the long term average. 60% of the current pipeline is in Edinburgh and Glasgow, with seven schemes (850,000 sq ft), completing in 2015 and 2016.

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■ Leeds, which has seen a large drop in supply over the last 12 months (-35%) and with less than one years worth of Grade A supply, is one of the other key cities to actually start fully speculatively at Wellington Place (100,000 sq ft).

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■ However, in the majority of regional cities they are still reliant on a pre-let or government funding to secure a start. We do believe however, that this is going to change in the next 12 months, with particular attention being paid to lot size, micro location and floorplates if these schemes are to be successful in the current market.

■ Manchester, for example, is likely to see up to five developments commence construction by year end, totalling c.900,000 sq ft, representing two year’s Grade A take up, with Leeds seeing a potential 300,000 sq ft likely to start on site in the next 12 months.

■ Savills believe that the development pipeline is approximately 18 months behind the current demand curve. Occupiers need to think ahead to ensure they secure high quality accommodation in the right location, with pre-lets likely to be the only option in many cases. With a bubble of lease events coming up in the next three years, occupiers will need to start looking now, to make sure they secure the best deal. Whilst not all will move, less austerity driven decisions should generate demand for more Grade A offices.

■ Although there is a limited amount of Grade A supply (27% of all regional supply), there is still a question mark over what will be done with the steadily increasing secondary space in these regional cities.

■ Much of the larger take-up this year has been underpinned by inward movers, resulting in an erosion of supply. Looking forward to the rest of 2014, a significant amount of larger regional lettings are likely to be from incumbent occupiers who, now more confident in the economic outlook, seek to upgrade their space. As a result we are likely to see a increased amount of 'grey' space returned to the market, consequently adding to the already oversupplied second-hand market.

■ Although more of this non-prime office space is being refurbished to absorb increasing demand, the trend for conversion to student housing is expected to continue in the short term. However, the gap between prime office and residential values has closed in many locations, due generally, to rising prime commercial values.

■ Savills June 2014 analysis shows that the rationale is becoming increasingly slim in many markets, and that office owners might better consider refurbishing the building to Grade A office standards.

■ The aforementioned lack of Grade A supply, however, is likely to drive prime rents higher as competition for existing accommodation heightens. The following 12 months could be an interesting time for landlords.

Taken from
Spotlight: Regional Office Market Report - October 2014