Leading property consultant CBRE’s H2 2016 Office Market Views for Scotland have shown success across the board in Aberdeen and Glasgow, with occupier demand on the rise in comparison to recent years. Supply reached a record low in Edinburgh but there are various new developments set to provide occupiers with high-quality options in 2017.
Aberdeen
In 2016, office space take-up declined to 218,708 sq ft. However, it picked up by 53% in the second half of the year increasing from 86,509 sq ft in the first six months to 132,199 sq ft in the last. The boost was down to Orega acquiring 25,408 sq ft in The Silver Fin Building and Citibase acquiring 22,082 sq ft at 9 Queens Road.
Demand for space in the city centre and west end is on the rise. Out-of-town occupiers could be open to relocating to various parts of Aberdeen when the new ring road, AWPR, opens this year. For example, Total have gone under offer to relocate from Altens to Subsea 7's surplus 108,000 sq ft HQ building in Westhill. The turn down in the energy sector continues to have an impact in this market. The public sector accounts for 25% of space take-up.
Availability in H2 2016 increased to 2.54m sq ft with second-hand Grade B stock accounting for 74%. A noticeable 13% rise from the first half of the year. The prospect of new developments in 2017 is unlikely. Nevertheless, landlords will be seeking refurbishment programmes for vacant buildings.
Gordon Pirie, director of CBRE in Aberdeen, said: “Following two years of falling oil prices, H2 2016 saw a steady increase and there are signs of a return to a positive sentiment in the oil and gas sector. We believe we may well be at the bottom of the cycle. However time will tell how quickly an upswing happens and how this translates into increased occupier demand.”
Edinburgh
Supply is at a critically low level in Edinburgh, with the market crying out for new stock. Take-up dipped from 442,625 sq ft H1 2016 to 291,198 sq ft H2. Nevertheless, take-up for the year was ahead of the five and ten year averages. EY secured the biggest deal with 32,268 sq ft at Atria. Meanwhile, the continuously expanding creative/ tech sector in Edinburgh has been responsible for 22% of take-up in 2016. Within this sector ST Microelectronics acquired 21,530 sq ft and Zone Retail Data Systems took 12,188 sq ft, both at Tanfield.
At the start of the year, numerous financial services requirements are under offer including State Street, and Aberdeen Asset Management, many of which pre-date the EU Referendum. With negotiations under way, 2017 is set to be a strong year for the capital. In addition, the Government Policy Unit seeking 180,000 sq ft is currently in negotiations to acquire the office content of Artisan’s New Waverley scheme.
Total office availability at the end of 2016 was 1.21m sq ft, a 20% decrease during the past year. CBRE notes that supply levels are almost at their lowest ever recorded. Second-hand space has plummeted to around one million sq ft for the first time on record. Three developments are currently under construction but there is scope for high-quality refurbishments in 2017. However, these opportunities are limited, as many potential refurbishments are being purchased for conversion to alternative uses such as residential or hotels.
Angela Lowe, senior director in CBRE’s National Office Agency team in Edinburgh, said: “With supply at a critically low level, the market needs the new stock to come through. There are a number of new developments including Quartermile 3, Edinburgh House, 2 Semple Street, and Greenside in the pipeline which will present occupiers with high-quality options in different locations across the city. A new wave of requirements are expected to become active in the early part of 2017.”
In 2016, prime rents in Edinburgh increased from £31.00 per sq ft in the first half to £31.50 in the second. Rents could rise further in 2017 as a result of limited stock. Nevertheless, occupiers will be seeking competitive incentive packages.
Prime rents in the city have remained at £32.00 per sq ft and are expected to stay at this level. CBRE notes a decrease in rents in the city’s west end. As supply levels rise, incentive levels are likely to increase.
Activity in the Aberdeen investment market remained fairly inactive for transactions in 2016. Uncertainty after Brexit, the prospect of a second independence referendum and sentiment in the oil and gas sector has resulted in weaker demand among investors.
With oil prices at just over $56 per barrel at the start of 2017, Brent Crude continues to trade at over half the level seen two years ago. This has had a detrimental impact on demand within the city centre. In 2016, investment transactions totalled £19m across three transactions. Anderson Anderson Brown building at Prime Four Business Park sold for £17.24m.
Gordon added: “With new developments nearing completion in the city centre and occupiers still awash with grey space, supply of secondary stock may take some time to be absorbed and rents will remain under pressure.”
Glasgow
The Glasgow office market had a solid performance with take-up in 2016 reaching almost 664,000 sq ft, a 21% increase on take-up in 2015. The figure is on par with the previous two years, despite leasing activity slowing in the second half. The largest deal of H2 was a 29,890 sq ft letting to Edrington Group at 100 Queen Street. During the year the banking & finance sector scooped 28% of space with the public sector following at 15%.
Demand in the city remains strong with active requirements of around 800,000 sq ft including the Government Property Unit, the Scottish Courts & Tribunal Service, Mott McDonald, Wood Group, Virgin Media and Zurich.
Available space in Glasgow totalled 1.54 million sq ft, a fall of 10% since the end of 2015. However, the availability of new build space has declined more rapidly. Overall supply levels in the city are now back down to the levels last seen in 2007/08. It is the fifth consecutive year in which ready-to-occupy supply has fallen.
Audrey Dobson, senior director in CBRE’s National Office Agency team in Glasgow, said: “Despite a lacklustre second half, take-up for the year was positive and well above the 10 year average. Despite potential geopolitical uncertainty the outlook for 2017 looks fairly positive underpinned by strong occupational demand.”
In Glasgow, prime rents currently stand at £29.50 per sq ft, mirroring H1 2016. Rental growth or incentive reduction is expected this year due to sustained occupier demand. Supply in the city was sitting at 1.54m sq ft at the end of 2016, a drop of 10% across the year.
Limited funding means there are currently no new developments under way in the city. However, FORE Partnership’s New Exchange scheme is due to commence at the beginning of the year.
Audrey continued: “The lack of speculative development is an increasing worry. Hopefully current market dynamics will be sufficient to encourage funders to support speculative development in the city in the near future.”