Comparing the UK’s regional office markets of 2020 with those of 2008-09, the last time the country was in recession, what’s remarkable is how the different the circumstances we now find ourselves in are.
In 2009, after several years of rigorous development, 20.4 milion sq ft of office space was available across the regional cities, meaning that once the Global Financial Crisis hit vacancy rates jumped.
Looking at the situation today, across the same markets only 11.3 million sq ft of space is available – 44 per cent less than over a decade ago. In some markets in particular supply is at almost critically low levels: available Grade A office space in Leeds, for instance, is at its lowest level in the last 10 years and in Glasgow supply is at its lowest point for five years.
The picture is broadly the same across all the UK’s major regional office hubs though: limited development activity combined with poor quality Grade B and C office space being converted to residential under permitted development rights (PDR).
Grade B and C space was generally over-supplied during the GFC, and was one of the main factors why rental growth then stagnated, but the lack of it on this occasion has contributed to the current low availability environment. We estimate that since 2015, if you exclude London, across England 31 million sq ft of office space has been converted to residential under PDR, highlighting the impact this policy has had on the regional office market.
The current long-term outlook for rental growth today is therefore robust. Our analysis shows that since 2007 average Grade A rents across the ‘Big Six’ regional cities since have not fallen when the vacancy rate is below 13 per cent. The current vacancy rate is just 7.5 per cent – the lowest on record – which illustrates the limited supply available.
Even adopting conservative assumptions which reflect the immediate weaker economic environment, we forecast that vacancy rates across the Big Six will remain below this 13 per cent threshold and continue to fall due to the limited development pipeline across these markets. These cities are unlikely to see their supply constraints alleviated in the short term as 61 per cent of their collective development pipelines under construction are already pre-let or let under construction.
Overall, then, despite the economic and behavioral disruption caused by Covid-19, we anticipate that the rental prospects for office space in the UK’s regions remain positive.
Further information
Market in Minutes: UK Regional Office Investment Market Watch
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