Capital office market facing a tough year

Published on Monday 14 September 2009 19:02

IT'S boom or bust time in the Edinburgh office market with too much grade A space coming on to the market this year at a time of decreasing demand and this will mean rents coming down by about 10 per cent from a high of £29 a sq ft to £26 by the end of the year.

This is the prediction by Drivers Jonas in its latest Crane Survey for Edinburgh – and it also reveals that rents have been slashed at the massive Waverley Gate which has been virtually empty for more than four years

The developer, Castlemore, called in the administrator early this year and a new letting strategy has been devised that has reduced the quoting rents by 35-40 per cent to 18-19 a sq ft.

Drivers Jonas states: "This building has not been favoured by many corporate or professional occupiers but at these new revised rental levels, and with excellent green credentials, we believe this offers good quality office space and good value for money. "

The report says there are no schemes in the Edinburgh pipeline for delivery after 2009. However, the construction slowdown follows a record supply year with 664,000sq ft of new space due to be delivered in the city this year, the largest supply to be delivered in a single year since the Crane Surveys began in 2000.

At the nine-year average annual supply rate of 264,000sq ft it is more than twice the annual supply.

Of the new space being delivered this year, 65,000sq ft has been leased with a further 60,000sq ft of new space under offer, equating to 19 per cent take-up of the new space.

Ian Lochhead, Edinburgh-based partner at Drivers Jonas, said: "The 60,000sq ft Springside development in Fountainbridge has been put on hold since last year's survey and will now only be developed if a pre-let is secured. This is a trend observed in most of the UK cities as developers feel the full impact of the recession and associated weak occupational market conditions. On a more positive note, a period of low completions over the next few years will allow supply levels in the market to be corrected and rental levels to stabilise."

Drivers Jonas calculates that take-up for the first half of 2009 was 220,000sq ft. Assuming this level of take-up is maintained throughout the final two quarters, it will result in an annual total of 440,000sq ft, the lowest level since 2001-2.

Despite the economic conditions, some financial and professional occupiers are taking advantage of weak tenant demand, falling rental levels and ample availability of experienced financial services employees to enter the market.

The report says that accommodation in west Edinburgh and second-hand city centre stock are under the most pressure, with rental levels plunging to 10 per sq ft within certain west Edinburgh buildings. Break options and lease expiries are being used by tenants as leverage to reduce their rent commitments on existing space with a preference to remain in occupation on more attractive terms than to relocate. Incentive packages offered to tenants rose steadily during 2008, and have increased further during 2009 to as much as 36 months rent-free for larger requirements.

Lochhead adds: "The Edinburgh office market is undoubtedly going to have a tough time over the next 12-18 months with a substantial pipeline of speculative space being delivered in 2009 alongside what we expect to be historically low levels of demand. Deals will continue to take place but at reduced effective rental levels as developers and landlords compete for tenants."

Life assurance firm snaps up warehouse

CANADA Life has paid 28 million for a 503,577sq ft warehouse in the ProLogis one million sq ft distribution and logistics facility at Newhouse in North Lanarkshire. The clincher for the deal was the pre-let to the Co-op of the warehouse – expected to be completed around the end of next year – on a 20-year lease at an annual rent of 2.5m. Drivers Jonas, who, with Evandeer Properties, acted for Canada Life, says that this type of investment is in limited supply and as the number of investors has grown, pricing has increased. Thomas Round acted for the Co-op with Colliers CRE and Cushman & Wakefield for ProLogis.

IN AN Aberdeen deal, jeweller ROX is investing 1m in a new flagship store at the Union Square shopping centre, its first store in the North-east of Scotland. Its 1,353sq ft boutique will open next month.

JACK Wills, the up-market university clothing chain, has taken a 15-year lease on 8,564sq ft in The Academy Centre in Aberdeen. CBRE acted for owners Royal London Asset Management and it obtained a change of use for the premises from public house to retail. 85,000 a year rent had been claimed. Culverwell acted for Jack Wills.

EDINBURGH Park and Fly has leased an acre at Harvest Road for its second site at Newbridge. It has struck a five-year deal with landlord MITCON to secure the land at 19,000 a year. MITCON's holding at Newbridge, which includes offices, industrial accommodation and land, is now fully let. Jones Lang LaSalle acted.

DINGBRO, a wholesale distributor of motor vehicle components, has taken a 25-year lease on 11,000sq ft at the Tradetown development in Ayr. The rent achieved was not disclosed but the quoted annual rent had been 84,000. J&E Shepherd and DTZ acted for landlord Stonedale Securities, which has planning consent for phase two of the development.

LOTHIAN Fleet Services, a commercial vehicle servicing and repair business, is relocating from its Livingston base to a 5,000sq ft unit at SCOT Sheridan's speculative development, Easter Inch Park in Bathgate, on a ten-year lease at a rent based on 6.40 per sq ft. The agents are JA Pollock and Ryden.

GLASGOW'S Forge Trade Park, being marketed by Colliers CRE and King Sturge, has secured its first tenant – Kwik-Fit. The car repair shop has taken 10,000sq ft on a 15-year lease at 6.50 per sq ft.

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