Jonathan Carmalt, King Sturge partner and Birmingham‘s head of office agency, explains why it’s hard not to be optimistic about the future of the Birmingham office market.
Central Birmingham’s office market continues to evolve on an almost daily basis, both in terms of the new developments that are progressing at pace and the improvement seen in overall office tak-up figures.
Despite the fragile confidence dominating the business world, the central Birmingham office market is bearing up relatively well. Lettings in the first three quarters of this year totalled 831,290 sq ft. That makes 2008 the best year for office take-up in central Birmingham since 2002, when Royal Bank of Scotland’s substantial pre-let at Brindleyplace boosted the annual total take-up figures to 935,000 sq ft.
The central Birmingham office market has been sustained in recent years by a good mix of public, professional and financial-service sector occupiers, particularly lawyers, accountants and banks.
As has been a typical trend in many of the regional cities, Birmingham has seen a dearth of new-build offices completing in recent years. During this time the city has tended to see only one new office building developed at any given time on a speculative basis, often with a gap of a year or two between each new development completing and letting.
There are now higher levels of office development activity in the city than has been seen since the 1970s. Some of the new developments have already secured pre-lets, which means that the market should not be faced with a significant over-supply of new-build offices.
In addition to the six buildings currently under construction, there are further major developments planned that will enable the continued expansion of the city and its office market. Such schemes include the likes of Eastside, Arena Central, Paradise Circus and Snowhill Plaza.
The vast majority of lettings that occur in the Birmingham office market are in respect of either new build or good-quality refurbishments. This reflects the fact that occupiers are driven towards seeking ever-improving office accommodation, which is so important both from a business efficiency point of view and for staff morale, as well as recruitment and retention in a normal market. In recent years this has had the overall effect of seeing an ongoing improvement to the office stock.
As part of the improvement in office stock standards, the developers of many of the new buildings are aiming for ever- improving BREEAM ratings and more energy-efficient buildings with competitive running costs. Eleven Brindleyplace, Calthorpe House, the Cube and Cannon House/2 Colmore Square are all expecting to deliver BREEAM “excellent” buildings.
Whilst such factors are becoming increasingly important to occupiers, they also provide marketing opportunities for the developers in a competitive market.
Whilst office availability can be a mixed blessing, the consensus is that there is not a significant oversupply in the city. The current availability means that Birmingham’s office occupiers have never had such a good standard of office accommodation to choose from.
This is important when trying to target occupier relocations and inward investment. In addition to product choice, there is also a wide range of rental budgets in grade A office stock. This varies between £18.50 sq ft at 54 Hagley Road to around £32.50 sq ft for the new-build schemes in the traditional core.
So what about the future? Clearly, this is a difficult question to answer in these times where fortunes are changing almost hourly! There are bound to be some occupiers delaying their office moves until there is some clarity in the financial and economic outlook.
The biggest threat to the apparent equilibrium will be if we see occupiers downsizing significantly and flooding the market with second-hand space.
I do not expect to see imminent or widespread reductions in prime headline rents in Birmingham, although there may be some quoting rent adjustments in those buildings that have been arguably overpriced in any event.
Furthermore, I expect that it will be the underlying incentives available for occupiers that will increase in the foreseeable future. Landlords will compete for deals and I expect that the successful ones will be those prepared to be flexible in discussions, structuring lettings to reflect occupiers’ concerns.
Deals are continuing to happen, particularly where occupiers are recognising the opportunity that now exists to move to better-quality office stock, without necessarily having to face significantly higher costs of occupation.
It is clear that conditions are extremely tough and we need a period of stability in the markets. Nevertheless, it is impossible not to be very optimistic for the future of central Birmingham’s office market.