Economy

12 months on from the EU referendum, and the economy remains in good shape. Wage growth remains stagnant, whilst inflation has risen to 2.6% at June 2017. Economic growth has seen a modest uptick to 0.3% during the second quarter of 2017, with the unemployment rate remaining at the lowest rate since 1975.

Indeed, this improving economic data is feeding into employer sentiment. Figures from Deloitte's Q2 2017 CFO survey indicate that 9% of employers expect to increase hiring over the next 12 months – a significant improvement on the 1% expecting an increase immediately post Brexit.

Occupiers are realising that Brexit is a process, not an event and they cannot continue to delay decision making. Oxford Economics have consequently revised their employment forecasts upwards. Bristol is expected to see 8,000 net additional office based jobs created over the next five years, reflecting 1.3% growth per year, faster than any other UK city including London.

Occupational

Take-up in Bristol city centre during the first half of 2017 reached 264,627 sq ft, 2% below the 10-year average, despite a shortage of large deals (Graph 1).

^{Source: Savills Research}

The largest deal was University of Bristol taking 31,785 sq ft of space at Augustine's Courtyard during the first quarter, whilst during the second quarter, corporate services provider, Jordans took 13,480 sq ft at Templeback.

Bristol's burgeoning TMT (technology, media and telecoms) sector accounted for 78,345 sq ft during the first half, more than any other sector during the first half of the year, despite the relatively small average deal size.

There is currently only 585,513 sq ft of available space in the city centre, a 21% fall since the start of the year (Graph 2). Of this, 166,000 sq ft is of Grade A specification, only enough for around 12 months of Grade A demand. The arrival of One Cathedral Square has provided a much needed 57,000 sq ft of Grade A space to ease the shortfall, whilst office to student conversions appear to have dried up as office supply has worn thin and prices have adjusted.

^{Source: Savills Research}

Aurora (below) remains the only speculative development currently under construction and will provide around 95,000 sq ft of space on delivery during Q2 2018. The first transaction has already exchanged in the building and there remain live enquiries.

Other earmarked developments include Assembly, Bristol which would provide up to 300,000 sq ft of Grade A space, and Glassfields which would provide 90,000 sq ft of additional office space.

Refurbished space will continue fill the gap over the next couple of years, with Programme set to complete before the end of September this year, providing 50,000 sq ft during the first phase.

With such a shortage of space in the market, in some circumstances, landlords are now able to let out second hand space without having to undergo extensive refurbishment costs. Whereas traditionally the space would have been refurbished after a 10-year term, the market has swung in favour of the landlord. The rental uplift from refurbishing is as little as £1 per sq ft on some assets, and eager tenants are willing to take the space as is. Buildings such as Colston Tower and 3 Temple Quay have been beneficiaries of this. Occupiers are consequently beginning to spend more on fitting out their unrefurbished space.

There are currently only 0.27 accelerators per 1,000 new businesses in the South West, around three times fewer than the ratio in London. There remains a gap for the delivery of follow on space, given strong demand from tech and creative companies in the market. Engine Shed provides a space for start-ups within close proximity to the station, but occupiers are currently forced into looking to serviced offices on their graduation. Engine Shed 2 will provide further work space for home-grown tech businesses, though more 2,000-3,000 sq ft lot sizes need to be delivered to allow the expansion of these fast growth companies.

^{▲ Aurora, Bristol will provide 95,000 sq ft of Grade A office space on its delivery during Q2 2018}

Investment

Bristol has seen £56 million of office based investment during the first half of 2017, around half the 10-year first half average (Graph 3). However, we have already seen a pickup in activity with c £105 million traded so far during the third quarter.

^{Source: Savills Research}

The largest deal during the first half of 2017 was AEW Europe’s purchase of Colston Tower for £17.5m, reflecting a yield of 6.6%. Resolution Property previously acquired the asset for £12.3 million during 2014. Salaft also acquired The Cube for £5.1 million, representing a 5.3% yield.

During the third quarter, we have already seen M&G purchase both 1 Georges Square for £26.2m at a 5.5% yield and 66 Queen Square for £30.1 million at a 5.3% yield. Tower Wharf also traded for £23.2 million, reflecting a net initial yield of 3.6%, though there is still 25,000 sq ft of refurbished space available which should see the yield rise to 7.5% once fully let. Prudential Buildings were also purchased as part of a portfolio by Columbia Threadneedle in the order of £21 million, representing a 6.5% yield.

There remains strong demand from UK institutional and overseas investors for core assets, however a shortage of development has led to limited availability of Grade A opportunities. Investor demand for value add and core plus opportunities in the city remains strong but opportunities scarce due to rental growth and refurbishment of Grade B in recent years.

The return of the UK institutions to the market during 2017 has applied further downward pressure on prime yields, which have moved in from 5.25% to stand at 5% at mid-year 2017.

Outlook

The outlook for the second half of the year remains positive, with take-up forecast to reach around 750,000 sq ft, should the Government Property Unit (GPU) deal complete. There are a number of 20-30,000 sq ft requirements currently in the market.

We expect headline rents to exceed £30 per sq ft for the first time on record during the third quarter of 2017, and to reach £32.50 per sq ft by the end of year. We expect refurbished rents to remain stable over the next 12 months, having seen considerable rental growth over the past five years to reach £28 per sq ft.

With overseas investors increasingly looking outside London for secure income, we expect to see increase investment activity during the second half of the year.

^{▲ Aurora, Finzels Reach is the only speculative office development currently under construction and will provide 95,000 sq ft of Grade A space.}

What Workers Want

How must occupiers and landlords react to workers' requirements?

Occupiers and landlords are increasingly looking at ways to retain both staff and tenants respectively.

Savills What Workers Want 2016 survey shows the factors which are most important to office workers in Bristol. Our chart below shows that 87% of workers consider the length of commute to work to be of high importance, however only 58% are satisfied with their commute. This suggests that respondents are either unhappy with the quality of public transport or the affordability of housing near their workplace. Bristol's £230m MetroBus network should provide improved transport links once it opens towards the end of this year.

Despite the shift towards collaborative working in open plan offices, 75% of Bristol's workers consider having a quiet space for focussed work to be of high importance. Despite this, only 31% of workers are satisfied with the provision of space. It is no wonder then, that the majority of workers are also dissatisfied with the general noise level in the office. We expect developers to react to workers' changing demands.

Bristol's fast growing TMT sector has seen particular growth in recent years, though so have the demands for wireless connectivity. 73% of workers consider good quality wireless technology to be of high importance. However, only 35% are satisfied with the quality in their office. Assembly Bristol is targeting to achieve a Platinum Wired Score which will demonstrate a tech enabled workplace when developed.