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The gap between primary and secondary office property to let is set to widen this year, says Jones Lang LaSalle. The firm’s Q1 research into the UK office market highlights the continued rationalisation of portfolios by large occupiers and says that take-up volumes “represent more churn than net absorption”.

The firm’s UK Regional Office Rental Index rose 0.7% in Q1 as prime rents stabilised across all markets, apart from offices in Cardiff and the Western Corridor, which saw some limited growth in rents. JLL expects the intensifying shortage of Grade A supply to continue to support limited prime rental growth in the regions. It forecasts growth of 2.7% per year overall during 2012-2016 in the major UK cities. The Western Corridor (office space in West London and Thames Valley offices) is forecast to outperform this, with a predicted growth rate of 4.3% per year during this period.

The polarisation of rents between prime and secondary properties will be exacerbated by the continued shortage of Grade A supply and the overhang of secondary product, the firm notes. The best space could see average rental growth of 2.2% in 2012 but JLL’s forecasts of IPD data indicate “much more limited growth of just 0.2%” for the wider market.

Jones Lang LaSalle has already seen some existing office space allocated for alternative uses, with about 500,000 sq ft of Birmingham offices withdrawn for other uses during 2011 alone. It expects more office stock to be allocated for change of use by the end of the year, as obsolescence of existing stock accelerates.

The supply of Grade A office space, by contrast, continued to fall during the first quarter of this year in most UK locations. At the end of Q1 there was 1.3m sq ft of office space under construction speculatively across all UK regional office markets, the firm notes, and just 360,000 sq ft is due to complete this year – largely confined to the Western Corridor. “With the development pipeline so low there is great potential for refurbishment of existing stock,” JLL adds. “Changes in sustainability legislation, workplace technology and corporate office requirements mean there is a significant amount of space on the market which, although available, is unlikely to be suitable for office occupation.”

“Speculative bank finance will be limited over the medium term, but partnerships with occupiers will open up pre-let funding and alternative sources of overseas equity offer some potential,” it adds.

The firm notes recent forecasts that office job growth will be flat this year across the UK as a whole, but says that structural lease events will provide some stability in regional markets. JLL estimates that 60% of take-up activity in the big six regional markets last year was lease-event driven. “In 2012 alone we track 10.0m sq ft of structural lease events in the core regional markets,” it adds. “While continued uncertainty may drive occupiers to restructure existing leases, structural demand will remain the key driver of activity this year.”

There was some improvement in the performance of the UK’s commercial property markets in April, says CBRE, with the firm’s UK Monthly Index showing that a marginal increase in headline total returns and a slowdown in capital value declines enabled All Property total returns to increase to 0.2% from 0.1% in March. Capital values were down 0.3% in April, taking the year-to-date fall to 1.3% while total returns for the year to date are 0.7% overall.

Central London offices again boosted the overall figures, with capital growth at +0.1%, driven largely by the markets for office space in the West End and Midtown offices. “This is in no small part down to the strength of occupier markets in the capital, which saw bumper rental growth of 0.7% this month, helping to offset softening yields in some other sub-sectors,” the firm added. The overall office sector recorded total returns of 0.2% in April, to take the year-to-date figure to 1.0%.

Total returns in the retail sector were flat (compared with a 0.1% fall in March) as growing income offset declines in capital value. Retail warehousing helped the final figure, recording a positive total return of 0.2% and reduced capital declines, CBRE noted. So far this year, total retail returns are just 0.1%.

The market for industrial property was the strongest sector, recording total returns of 0.4% despite a marginal decline in capital values. Income in this sector was described as “healthy”. Year-to-date total returns for industrial property have now reached 1.5%.

Nick Parker, senior analyst of economics & forecasting at CBRE, said: “With the Olympics and Jubilee celebrations fast approaching, it is widely expected that traditional purchasers of UK property may well take a longer than usual summer break and resume activity in the third quarter, when they will also expect to have greater clarity on the economic outlook, particularly with the UK now in a technical recession.”

But following this hiatus, he thinks that the third quarter “could spell the turning point of this current weak period, with yields flattening out and economic traction starting to feed through into more stable occupier markets.”

Jones Lang LaSalle says around 3.6m sq ft of industrial floorspace was taken up in the Western Corridor (west London and the Thames Valley) during the second half of 2011, taking the total for last year to 6.1m sq ft – a jump of 45% over the 2010 figure “and 90% higher than the 2009 recession”. The recovery in air freight at Heathrow helped to bolster the figures for 2011.

The market for industrial property in west London (including Heathrow industrial units) accounted for 55% of the total while Thames Valley industrial space made up the other 45%. As well as some large warehouse transactions at Heathrow, there were three significant data-centre deals last year – at Heathrow and on the Slough Trading Estate.

Two large pre-lets of industrial space in Reading boosted the take-up total in H2 2011 – Tesco signed up for a 950,000 sq ft facility at the former Berkshire Brewery site, while Brakes Group signed for a 207,000 sq ft property at Suttons Business Park. Grade A floorspace accounted for 38% of the total taken up in 2011, at 2.3m sq ft. This was a sharp increase from the 802,000 sq ft taken up in 2010. Take-up of Grade B floorspace was up 7% y/y at 3.0m sq ft, while Grade C take-up was up 33% at 748,000 sq ft.

Despite the increase in take-up, availability of industrial property in the Western Corridor also rose last year, although the gain was just 2% to 12.7m sq ft at the end of 2011 compared with a year earlier. The rise in availability reflected the return of some secondhand Grade B space to the market. The supply of Grade A space was actually 41% lower year-on-year at 1.5m sq ft.

Jones Lang LaSalle says that developers are waiting to see how last year’s speculative developments do before looking again at more speculative opportunities. “A small number of schemes are speculatively under construction in core markets and developers are in the process of assessing current sites for potential development, but with a sense of caution,” the firm adds.

Prime rents for industrial property in Slough, Reading industrial units and Park Royal industrial and warehouse property edged up last year, but were mostly stable elsewhere. Incentives are now starting to come in for core markets such as Park Royal, Jones Lang LaSalle says, suggesting that the market is now moving more in favour of landlords in terms of prime properties. The firm thinks prime headline rents could harden further this year in markets such as Park Royal, certain A40 locations and parts of Heathrow.

Jones Lang LaSalle expects demand for industrial floorspace in the Western Corridor to remain relatively flat in the first half of this year, but thinks that an improving economic outlook in the second half and a pick-up in air freight activity at Heathrow should support stronger occupier demand for industrial and logistics space in this region.

Bowyer Bryce has agreed the sale of 241 High Street in Waltham Cross for £249,995. The freehold property comprises ground and first-floor office space totalling 1,032 sq ft in a retail parade a short distance from the Pavilion Shopping Centre and close to the railway stations at Theobalds and Waltham Cross.

The property includes parking for up to six vehicles at the rear and in Bowyer Bryce’s opinion the first-floor space could be converted to residential accommodation, subject to the necessary planning consents. See Novaloca.com for further details of Waltham Cross retail property and office space in Waltham Cross, and see the full listings available on Novaloca.com for information about other property available through Bowyer Bryce.

Meanwhile sbh Page & Read has agreed a 15-year lease on a 3,451 sq ft retail unit in Wood Green. Unit A at Eclipse House has been let at £50,000 per year. In Haringey, sbh Page & Read has let an industrial unit on the Rangemoor industrial estate comprising 3,935 sq ft of space to Wolseley at a rent of £31,000 per year, on a lease of four and a half years. NovaLoca.com carries plenty of information about other properties for sale and to let in Wood Green and available property in Haringey, and full listings of all properties available through sbh Page & Read.

Continuing our look at DTZ’s latest research into regional office markets, the Edinburgh and Glasgow office markets have enjoyed a strong start to the year. Take-up of offices in Edinburgh city centre during Q1 reached 127,000 sq ft, which is the highest quarterly total for two years. The 48,000 sq ft letting to Brewin Dolphin at Atria boosted the total figure.

While the occupier market remains fragile, DTZ notes that the finance sector has recently become more active in Edinburgh and says that “current requirements do suggest that annual take-up in 2012 will be greater than 2011”. A spate of lease expiries around 2014-16 could lead some occupiers to relocate early, in order to secure their preferred office buildings, it adds.

Estimated quoting terms for prime rents and incentives in Edinburgh city centre are judged to have remained at £27.50 per sq ft. Brewin Dolphin, which is bringing together a number of offices at the Atria site, is reported to have paid £30-£32 per sq ft for its pre-let, but the details of the fit-out and rent-free period have not been substantiated, DTZ notes.

Current specific requirements for Edinburgh offices include 75,000 sq ft for Blackrock and 35,000 sq ft for the NHS. DTZ thinks further pre-lets are likely if suitable space is not available – for example, Cairn Energy (seeking 50,000 sq ft) could go down this route, it adds.

Grade A availability in Edinburgh is expected to continue to fall as investment capital remains limited for future refurbishments. “Our central scenario is for less generous lease details and incentive packages over 2012, with a pick-up in prime headline rents in 2013,” DTZ says.

In Glasgow, city-centre take-up in Q1 was at its highest since Q3 2010, at 123,000 sq ft. Most deals involved Grade B space, as has been seen in recent quarters. The Q1 figure was boosted by several fourth-quarter deals that eventually completed during the first quarter of this year.

As a result of the marketing of an additional 115,000 sq ft of Grade B space, the total availability of city-centre offices in Glasgow rose slightly during Q1, and it is expected to dip only slightly towards the end of this year as the volume of deals is forecast to match the release of existing space, DTZ says.

The largest current city-centre requirement is for a 200,000 sq ft design-and-build scheme for Scottish Power, for which a developer competition is under way. The utility is thought to have found a preferred site for the building, which will be its new headquarters.

Prime headline rents remained at £28.50 per sq ft in Q1 and incentives held firm at around 12-18 months on a five-year term. DTZ says prime rents for Glasgow offices are unlikely to rise until 2013, it adds, when there is some potential for pre-lets from larger occupiers.

Prime office yields in Edinburgh and in Glasgow are thought to have moved out 25bp in Q1 to 6.25% as the sector is not popular with funds, the firm says. Prime yields are expected to remain stable over the summer in Edinburgh, but to move out another 25bp in Glasgow.

Take-up of office space in Leeds during the first quarter was the highest for more than four years, says DTZ. In its latest research into regional office markets, DTZ says Leeds city-centre take up was 155,000 sq ft during Q1, and that this followed three strong quarters, indicating improving sentiment in the market.

“Tenants are continuing to take the opportunity to move into better quality space at discounted costs,” the firm says. Transactions were mainly driven by lease events and expansions, with activity in the insurance sector particularly prominent, it adds. Prime headline rents remain around £25 per sq ft but incentives hardened during Q1 as the supply of Grade A stock shrank, to 12-15 months on a five-year lease from around 15-18 months previously.

DTZ says there continues to be plenty of occupier demand for available Leeds offices, which is translating into requirements in the market. These include Capgemini, which has shortlisted three options for a 14,000 sq ft requirement; Leeds Building Society, which is considering various options; and legal firm DAC Beachcroft, which has begun to look at pre-let options. Pre-lets to KPMG (65,000 sq ft) and Walker Morris (100,000 sq ft) could transact later this year – both firms are seeking better offices in Leeds ahead of lease expiries. “Depending upon pre-let activity this year, prime headline rents may be revised up to £26 for 2012,” DTZ adds.

While investor sentiment in the Leeds office market remains fragile, it has not worsened this year. Prime office yields were unchanged at 6.25% for the first quarter and are expected to remain stable over the summer months. “Q1 has seen a number of new investment opportunities appear on the Leeds market, which are likely to transact in 2012. These include 1 Embankment occupied by KPMG and 6/7 Park Row occupied by Lloyds Bank,” DTZ notes.

Meanwhile, DTZ says take-up of office space in Newcastle city centre rose to 40,000 sq ft in Q1, with increased activity in lettings and enquiries indicating that sentiment is improving there too. The average requirement size rose to more than 5,000 sq ft, signalling renewed demand from larger occupiers, the firm notes.

Occupiers from a wide range of sectors showed interest during the first quarter, although DTZ notes a growing trend of engineering and offshore companies locating in Newcastle. The out-of-town market was stronger than the city centre, both in terms of the number of transactions and also the size of the deals.

The amount of available offices in Newcastle city centre continued to decline in Q1. Prime rents remained at £20 per sq ft and incentives stayed at two months per year term certain. DTZ expects prime rents to remain at this level until 2013 before rising as a result of a lack of available prime stock. “Prime incentives have already peaked and are forecast to harden,” it adds.

Investor sentiment in the Newcastle offices market is again fragile but has not worsened. Prime office yields were unchanged in Newcastle during Q1 at an estimated 6.50%, the firm notes.

The latest research from the Local Data Company indicates that vacancy rates for retail premises have continued to rise as the challenges for retailers continue. The only major change seen in the first quarter of this year, the LDC says, is “the increasing hold the banks have on many retailers and retail assets as refinancing takes place”. The firm says that this is a major issue and its “true impact” is still to be seen.

The national shop vacancy rate rose to 14.6% in Q1 2012, the LDC says, but there is the usual wide range of vacancy levels around the UK from 36% of retail premises in Kensal Town to 2% of retail property in Rickmansworth. Of the 205 town centres that the company visited during the first quarter, it says 34% have more empty shops than a year ago, while 10% have remained stable, and 56% have seen some improvement – albeit a small fall in vacancies in most of these town centres.

The LDC expects the gap between better-performing and weaker town centres to continue to widen this year, depending on local factors such as unemployment rates and levels of consumer spending, but also depending on what it terms “the fight between the high street, the shopping centre (in and out of town) and the edge/out of town retail park”.

The company warns that retailers in towns with low vacancy levels may still be encountering difficulties. “Low vacancy towns may appear to be healthy but if the retail offer is considered to be worsening in quality of offer, as the ongoing debate
around rising numbers of £ shops, pawnbrokers, bookmakers and charity shops highlights, then this can be just as detrimental to the long term prospects of a town as empty shops but of course councils will likely to be receiving greater business rate revenues!” the LDC adds.

The town centres with the highest vacancy rates were Kensal Town, Morecambe, Dudley, Fratton and Dartford. The best centres in terms of vacancies were Sherborne, St John’s Hill in Battersea, Woodford Green, Rickmansworth and Lincoln.

DTZ’s latest research into the market for office space in Central London has found that the West End offices market was the strongest during the first quarter, with occupiers in the retail sector boosting activity, while leasing activity in the market for City office space remained subdued. But DTZ expects to see a reversal of these trends later in the year, as the level of floorspace under offer in the City has risen sharply – and now accounts for 63% of the Central London total – while the amount under offer in the West End has declined following recent strong leasing activity.

Overall take-up of offices in Central London fell 17% in Q1 to 2.2m sq ft, which is well below the 10-year quarterly average of 3.1m sq ft, DTZ notes. The figure for the final quarter of 2011 was 2.6m sq ft. DTZ expects take-up to remain below trend in the short term as occupiers remain cautious, but it feels that the mid-term outlook is more positive. Active requirements remain above trend, DTZ notes. It forecasts that take-up will recover to 2011 levels towards the end of this year and will increase further in 2013.

The availability of office space in Central London continued to rise during Q1 to 14.3m sq ft, or 6.1% of stock. This compares with the recent low of 13.3m sq ft seen in the third quarter of 2011. Supply of secondary space has risen and the level of satisfied demand is low, the firm notes. Pre-leasing activity has been triggered in the West End by the shortages of prime office space in certain areas.

Rents for prime offices have remained unchanged in most Central London markets during Q1, except for offices in Southwark, where they rose to £45 per sq ft from £42.50 per sq ft. DTZ notes that prime rents for City office space have not risen for 12 months now as a result of weak occupier activity levels, and it does not expect them to rise until the end of 2012. It forecasts that prime City rents will reach £59.50 per sq ft in 2013 with incentives falling to 18 months rent-free on an assumed 10-year term. In the longer term DTZ expects a supply imbalance to boost rental levels further and sees prime rents for City offices reaching £67 per sq ft before the end of 2015.

In the West End, DTZ expects a modest increase in prime rents to £97.50 per sq ft from the current £95 per sq ft before the end of this year, thanks to a shortage of Grade A space in the Mayfair and St James’s areas. It then expects prime rents for West End office space to reach £100 per sq ft in 2013 and £125 per sq ft by 2016.

Supply constraints are also expected to boost rental growth for prime Mid-town office space, with the current £55 per sq ft forecast to rise to £60 per sq ft in 2013 and to £67 per sq ft by 2016.

The investment market for offices in Central London was strong during the first quarter, with transactions totalling £3.3bn recorded – more than 50% above the £2.1bn seen in Q4 2011 and the highest quarterly total since Q4 2010, DTZ points out.

Jones Lang LaSalle yesterday held its North West Breakfast seminar in Manchester where it issued predictions about the outlook for the UK economy, and the implications of its forecasts for the market for retail property in Manchester and the North West region.

Andrew Burrell, head of forecasting at JLL, said retail trends regionally are slightly weaker than the UK average, with sales growth in the North West lagging behind national rates. He does not expect the growth gap to close this year, given the weak fundamentals for high streets across the UK. He did note some tentative signs of returning consumer confidence, but expects progress to be slow over the next year or so. Beyond that, he expects the outlook slowly to improve and normal growth rates to resume after 2013.

Ben Parker, from JLL’s Northern Retail Agency team, said the firm’s research had shown that up to 50% of existing leases on high street retail premises are due to expire by 2015 as the 25-year leases signed in the 1980s and the 10-year leases of the 1990s are coming to an end. “We have not yet seen the true effect of the shift in demand on our retail landscape, but the next 24 months are likely to see a swift and dramatic ‘playing out’ of these structural changes,” he added.

Mr. Parker says the upcoming spike in lease expiries will enable retailers to rationalise their portfolios, effectively walking away from leases via natural wastage. He expects the gap between “winners” and “losers” to widen, and says this will increase the polarisation between prime retail property and secondary retail locations.

Also speaking at the event was Edward Blood, capital markets director in JLL’s Manchester office, who gave an overview of the out-of-town and supermarkets sector. He noted there were only a limited number of retail warehouse deals in Q1 2012, with UK volumes totalling around £150m compared with the £500m transacted in the same quarter of 2011. “Certain properties are over valued with elements of over renting together with covenant risk and capital expenditure requirements, which is impacting on valuations and the level of deals,” he noted.

Mr. Blood feels that there is potential for further retail failures and thinks future rental growth is likely to be patchy. In the investment market, he says pricing on secondary retail parks with poor occupational demand continues to drift, while opportunities to buy prime assets will be limited. “We anticipate those properties with deliverable asset management will remain the ‘Holy Grail’ for investors,” he added.

The UK has been ranked as the top location in Europe for data centres, says new research from Cushman & Wakefield and hurleypalmerflatt. The Data Centre Risk Index 2012 report looks at the risks likely to affect the successful operation of data centres including energy costs, connectivity, the likelihood of natural disasters and political instability.

The UK has moved up to the top slot in Europe – and the second place worldwide after the US – from fifth position in 2011. “Its high international internet bandwidth capacity and ease of doing business put it above all other European locations surveyed,” the firms say. Germany was the second-placed European location while the newly emerging markets in the Nordic countries also performed strongly.