A fear of missing out on the opportunity to acquire quality office space is supporting rental values in the UK regions.
Latest data from Cushman & Wakefield shows that prime headline rents either remained stable or rose in all of the UK’s ‘Big Eight’* regional office markets in Q3, despite occupier demand being severely impacted by COVID-19 restrictions.
Limited construction activity related to a relative lack of funding for speculative development alongside rising construction costs has led to low levels of new, quality office stock across the regional markets.
The vacancy rate for new and refurbished supply across the UK regions is just 2.1%, comfortably below the long-term average of 2.5%.
In some cities, new and refurbished supply is at generationally low levels. In Newcastle there is approximately 45,000 sq ft of speculative grade A office accommodation left, with no new development completions until late 2021 at the earliest.
Greg Davison, Partner, Office agency at Cushman & Wakefield in Newcastle, said: “Whilst office demand across the UK may have thinned, the supply of quality office stock is thinner. Those occupiers with a need to move have focused their attention on the best available space, which can support state-of-the-art air conditioning and social distancing measures to provide a safer working environment. The paucity of space in the pipeline has led tenants to a realisation that if they don’t act now, they may find themselves forced to consider less suitable options, which will make it more difficult to attract and retain staff in the future.”
He continued: “In Newcastle, we have seen three lettings complete at The Lumen this year, all at the new headline rental level of £26.00 per sq ft, and all completing since June. Whilst there is a good level of lower quality stock available, the supply of true Grade A is limited. We anticipate occupiers focussing more and more on the quality of the work environment they are providing their staff, particularly as those staff are likely to be afforded greater freedom to choose where they work from. As an employer, you want staff going to bed on a Sunday evening enthused by the prospect of going into the office on Monday morning rather than working from home. Creating and offering an inspiring workplace has a significant role to play in that scenario.”
Patrick Scanlon, Head of UK Offices Insight at Cushman & Wakefield, said: “Data for the third quarter suggests that demand for office space is now almost half of average levels. Despite this, supply remains under control with such a limited development pipeline and little evidence of any significant release of space by distressed tenants. In previous real estate cycles, a combination of falling demand and rising levels of supply have dragged rents down; so far in this cycle only one of those factors is present, which has supported values for new and refurbished space.”