Very healthy office take-up of over 800,000 sq ft for the first half of 2014 in Manchester city centre currently grabs all of the headlines and we are being constantly reminded of a shortage in supply of brand new, “Grade A” specification office space in the city centre.
Whilst, the upsurge in take-up is a clear indicator of an improving office market, fuelled by a strengthening economy the intense demand for regional offices from institutional investors is more a result of a lack of returns in the over-heated London/South east market, rather than a seismic shift in the occupational market.
The lack of Grade A supply is being used as justification by many agents to convince developers to commence speculative construction of offices schemes – and so it starts again. It only takes a few to jump on the bandwagon and, before we know it, there is an over-supply of space. The best schemes (in terms of location, design and specification) always succeed but their success can often be tempered by competition from less well conceived developments.
One St Peter’s Square is the only new Grade A office scheme currently under construction and still offers c. 200,000 sq ft of vacant office space, that cannot be let to a “big 4” accountancy firm due to the presence of KPMG. Developers are mulling over speculative development of another c. 600,000 sq ft of new offices, so we could have c. 800,000 sq ft available in 2 years. Granted, there is every chance that some of this supply will be absorbed during that period, but as many of the large professional and financial firms already in Manchester have moved within the last 10 years, there is only so much more “shuffling of the pack” possible.
In the meantime, there is an opportunity for the better quality “grade B+” office buildings to take advantage of a paucity of Grade A supply.
The confirmed move of KPMG to One St Peter’s Square will make available a large chunk of c. 60,000 sq ft at their existing building – 1 St James’ Square. This will no doubt be refurbished & upgraded to provide good quality “grade B+” space. Mooted moves of PWC, DLA and/or Ernst & Young will have a similar result at Barbirolli Square.
As with new office space, the better quality refurbished space will have little difficulty in re-letting, but this is not a “given”. Care has to be taken over the style, quality and cost of refurbishment proposals.
Landlords of Grade B+ buildings need to take care over refurbishment proposals. In many cases, it is not just a case of looking at figures in a spreadsheet/appraisal and trying to make the numbers work. Of course this is important, but landlords need to look beyond this at what they are actually providing compared with what the market wants.
The office market is continually evolving in terms of the make-up of occupiers, the technology of office space, the lease terms required by tenants and how office space is actually used however, fundamentally, offices are still places for human beings to work in. It is not simply a case of spending “x” to get a rent of “y”. The accommodation needs to be appraised in terms of strengths and weaknesses and the refurbishment scheme needs to take these factors into account. Good design is vital. It is very tempting to save money on design fees, but, in the long term this could prove even more costly if a building takes longer to let.
The trick is to differentiate the accommodation against the competition. In doing so, the building will compete more on product and less on the financial deal. The most important part of the building in this respect is the main entrance – the first impression to visitors. Lettings are won and lost in this moment and this is where most design thought needs to go. Get the main entrance scheme right and you immediately gain the attention of prospective tenants. Good examples of this in Manchester City Centre include 19 Spring Gardens, St Ann’s House, 52 Princess Street and Clarence House.
There are other ways of differentiating a building. Even on the higher rental value buildings, there is always room for a little “quirkiness”. Interesting detail grabs occupiers’ attention and plants the building firmly in the positive memory bank, whilst unimaginative designs are quickly forgotten. When tenants are viewing dozens of options, product differentiation is critical. Good examples include Bruntwood’s Roof Garden at Blackfriars House, the exhibition space at 52 Princess Street and the swings in the reception of 54 Princess Street. It doesn’t have to be in the refurbishment design itself. Having the right person on the front desk makes all the difference. A polite, professional and welcoming Concierge is far better than a bored, grumpy security guard!
Those landlords who give the market what it wants will reap the rewards. It is not necessarily a case of spending more money on refurbishment – rather spending it in the right areas to create the right effect. Many landlords still work on the outdated model of spending as little as possible on refurbishment, whilst trying to get the maximum rent possible. On many occasions, these sums just don’t add up.
The office market is strengthening and the opportunity now exists for smart landlords to capitalise.