Tom Fleming spoke to Jonathan Fear about why grey matters in Birmingham.
With evidence that recession is already having a significant negative impact on the office space requirements of many businesses, Jones Lang LaSalle anticipates that fewer office lettings will transact over the next twelve months.
Those that do will largely be derived from general market churn resulting from lease events such as lease expiries, rent reviews and break options according to the agency.
Almost 900,000 sq ft of office space in Birmingham city centre is subject to a lease event within the next two years, however this is forecasted to generate less transactional activity than usual as more occupiers, some of whom are under increasing pressure to reduce the space they occupy, seek lease regears and negotiate more favourable terms to remain in their existing accommodation.
Jonathan Fear, head of Jones Lang LaSalle’s National Office Agency team in Birmingham, said: “Currently, of the 2.8m sq ft of office space available Birmingham city centre, just over 400,000 sq ft is tenant-led or ‘grey space’, equating to 14 per cent of the total space on the market. Whilst our research shows that there hasn’t yet been an influx of supply controlled by office tenants, it is anticipated this will increase over the second half of this year as occupiers manage adjusted headcounts.”
He continued: “Birmingham’s office market is often characterised by conservative, indigenous growth; a trait which for the time being is serving it well. Occupiers have worked hard over recent years, during the period of rising markets, to try and avoid surplus space in their property portfolios and only a handful have undertaken a major relocation to consolidate multi-site locations. As a result many good quality covenants can still be found in poorer quality space. Another strategy adopted by businesses to limit long term exposure to surplus space has included using serviced office space for overflow or start-up space; which can be used more flexibly.”
Despite occupier caution, Jones Lang LaSalle anticipates that the spectre of company failure and merger activity will drive property change forcing subletting, lowering accommodation costs and potentially releasing more occupier-controlled space back onto the market. The volume of this ‘grey space’ will influence the severity of the decline in market conditions and will put additional pressure on rents, as tenants looking to sublet their surplus space, will be forced to drop rents to get space off their balance sheets and save costs.
The majority of Birmingham-based tenants have successfully sought to avoid the grey space issue, and whilst there is evidence of businesses offloading space; it remains a trickle as opposed to a flood. For those occupiers wishing to sublet or assign space they need to be pragmatic about what accommodation to release and how best to bring it to the market. Any subsequent property strategy for dealing with ‘grey space’ will vary greatly according to the financial position and strategic imperatives of each individual occupier.
Jonathan Fear continued: “On the flipside, there are currently opportunities for those occupiers looking to acquire office space to take advantage of weakening market conditions and highly competitive leasing terms, although our advice to them would be to act quickly as this favourable leasing environment won’t last forever.
He concluded: “The relative conservatism of Birmingham-based occupiers has resulted in steady demand for space as opposed to the peaks and troughs exhibited in other UK cities, most notably the more volatile London sub-markets for example. When combined with the anticipated falls in supply and forecasted upturn in the economy, we expect that from late 2011 conditions will move back in favour of the landlord.”
