Edinburgh office imbalance reaching 'chronic' levels amid tech lettings boom

Edinburgh’s office market has enjoyed a positive start to the year led by the booming tech sector while an imbalance between the supply and demand of office space in the capital is reaching “chronic” levels, a new study suggests.

The first quarter of 2023 saw 90,872 square feet of office take-up, excluding re-gears, according to commercial property consultancy Knight Frank. While lower than the 100,856 sq ft recorded in the same quarter last year, this pushed the city’s vacancy rate down to just over 8 per cent for all grades and below 1 per cent for top-quality Grade A space. Technology, media, and telecommunications (TMT) organisations accounted for the largest share of take-up in the opening three months of 2023, at 34 per cent. Telecoms regulator Ofcom secured 9,650 sq ft at Quartermile in the largest new deal of the quarter.

Energy companies represented another 20 per cent of total take-up during the first quarter, with Falck Renewables and Orsted taking 7,147 sq ft each at 2 Lochrin Square. Knight Frank said it was involved in four of the quarter’s top five deals, representing 47 per cent of total take-up. With space currently under offer at £42.50 per sq ft and 76 per cent of the 370,000 sq ft of space scheduled for 2023 delivery already pre-let, the firm is forecasting further rental growth before the end of the year.

Hide Ad
Hide Ad

Simon Capaldi, office agency partner at Knight Frank Edinburgh, said: “The imbalance between the supply and demand of office space in Edinburgh is reaching chronic levels. While there is new space in the development pipeline, the vast majority of it has been pre-let and only refurbished product is available until later in 2024. In fact, much of the best quality space that is available is second hand and there is a real lack of Grade A building stock which can supply floor plates of less than 10,000 sq ft, where much of the demand is coming from. This is putting pressure on quality stock in the city centre, which may push more occupiers to out-of-town locations.

“The flight to quality amongst occupiers that came about during the pandemic has intensified, with many now insisting on ESG [environmental, social and governance] credentials, wellbeing facilities and prime amenities as part of their property needs. Occupiers are also increasingly looking for landlords to push forward with proposed refurbishment plans ahead of entry this year, with ‘plug and play’ office options also remaining in-demand.”

The Knight Frank report comes just days after it emerged that a lack of “flexible and sustainable” office space has led to an increase in lease renewals in both Edinburgh and Glasgow as more firms stay put. Property agency JLL said that In Edinburgh, economic uncertainty and limited choice meant that lease renewals reached a record high of more than 350,000 sq ft in total in 2022, driven by a “wait and see” mentality for many occupiers. Compounded by “return-to-work challenges”, the firm said this trend had continued into 2023 with almost 100,000 sq ft of re-gears completing in the past quarter, equating to more than 40 per cent of all activity.

JLL’s research found that total take-up across Edinburgh and surrounding areas hit 123,000 sq ft in the first quarter of this year, down slightly on the figure of 140,000 sq ft seen across the same period in 2022. However, property experts noted that several occupiers have spent the opening months of 2023 organising and preparing their internal property strategy for the coming months.

Cameron Stott, head of Scotland at JLL in Edinburgh, said: “As an increasing number of tenants look to secure sustainable office accommodation in the city centre, and with a tight pipeline of new office space on the horizon, Edinburgh’s office market continues to be defined by high levels of competition compounded by a critical lack of supply, with several construction projects yet to begin.”

Quartermile was one of the Edinburgh office developments to attract a key letting deal in the first quarter of the year.Quartermile was one of the Edinburgh office developments to attract a key letting deal in the first quarter of the year.
Quartermile was one of the Edinburgh office developments to attract a key letting deal in the first quarter of the year.

Fellow property advisory firm Lismore Real Estate Advisors is also forecasting growing interest in prime city centre offices, particularly well-let regional offices in locations with limited supply such as Edinburgh. The firm said the Scottish capital was benefitting from a “broad base” of occupier demand, with financial and professional services particularly active currently. This is against a background of low supply, resulting in rental growth.

The firm noted that vacancy rates were low across all grades, particularly in the city centre. It argued that this may defer the refurbishment of some buildings which are becoming obsolete, as owners are able to maintain income in a market with low supply.

According to recent research conducted by Lismore, 56 per cent of investors do not anticipate an increase in transaction volumes in the prime office sector during 2023. However, investment managers are more positive, with a similar 56 per cent expecting volumes to increase. The consensus from respondents is that hybrid working is a structural change in working habits, with a majority of respondents expecting it to remain.

Hide Ad
Hide Ad

Andy McKinlay, chairman of property investment firm Ediston Real Estate, said: “Prime, well-let, new builds with modern occupier-led space and strong sustainability credentials will continue to attract occupiers and trade well. Peripheral buildings can work, but only if repurposed to meet the necessary ESG and wellness credentials, whilst secondary office values need to fall further to reflect post-pandemic demand and capital expenditure. Buildings delivered over five years ago are overpriced and lack the necessary ESG credentials.”

Related topics:

Comments

 0 comments

Want to join the conversation? Please or to comment on this article.