Our Business Space Team reflect on the first half of 2018 and review the take-up of office accommodation.
Is the Hertfordshire office market starting to feel the effects of an uncertain economy?
Are the record low levels of available office accommodation starting to have a knock-on effect on take-up?
The truth of the matter is it is probably elements of both. Take-up for office accommodation for the first half of 2018 has seen a considerable drop-off across the region and is now at its lowest level in over five years. There are a number of underlying factors that we can attribute to what we believe to be a short-term reduction and have identified these as follows:
- An Uncertain Economy
The statistics are portraying an economy that is sluggish with limited confidence about growth. Brexit and other international factors are playing their part, making occupiers nervous and correlating with a noticeable reduction in demand for office premises. Furthermore, prospective tenants are seeking more flexible arrangements with longer-term deals becoming less appealing, particularly at the smaller end of the market. This is evident in the serviced office sector which has seen its market share grow significantly in the last two years. We have also seen increased demand for office space under 5,000 sq. ft. proportionally higher than we have seen in recent years.
- Growth in Office Levels
The regional office market has seen strong growth in the last few years with record rents being achieved across the region. In the last six months, we have seen rents as high as £33 per sq. ft. in St. Albans, £32 in Watford, £27.25 in Hemel Hempstead and £25 in Welwyn Garden City. The strong demand and reducing supply has created an extremely competitive market pushing rents up by as much as 30% and possibly making it unsustainable for a number of occupiers in the long term.
- Quality not Quantity
The current availability levels in Hertfordshire are at record low levels meaning the options available to occupiers are limited. Perhaps aligning with our comments about securing flexible terms there is the notion that tenants are prepared to wait until the ‘perfect’ property is presented to them before committing to a longer-term solution.
- The End of Permitted Development?
Back in February, we wrote an article on the increasingly limited Permitted Development opportunities in the market. Higher capital values are making these schemes less viable as is the decreasing stock level which is making opportunities scarcer. In addition, the volatile housing market, which is going through an uncertain period, is making developers less likely to take a risk.
- Lack of New Development
There has been minimal office development since the last recession of the late noughties with only a small number of new office buildings built in the past 10 years. Up until now, it has been financially difficult to make a new scheme work however with rents continuing to rise we are confident new developments will be coming forward in the near future; increasing stock levels and choice for a prospective tenant.
While the office market is continuing to grow (albeit at a slower pace to recent years) 2018 has been a difficult start for landlords and occupiers alike. A lack of options and an uncertain economy has led tenants to seek more flexible space, if at all, however, landlords are still benefitting from rental growth with the demand that is there. In addition, we are seeing numerous examples of good quality projects being rewarded. The developments at 36 Clarendon Road and Croxley Park, Watford and the high spec refurbishment at Westside, Kings Langley (pictured) have seen strong demand and record rental levels for their respective locations. Demand is there for the right product and these Grade A buildings are good illustrations of this point.
Furthermore, with the conclusions of Brexit fast approaching, consumer confidence increasing and market growth forecasted we remain optimistic that going forward we will see not only an increase in development and high-quality refurbishments but strong demand and an upturn in take-up.
For more information on the regional office market or for advice on acquiring, letting or disposing of office properties please contact us.