Liverpool’s office supply dries up after record year
The city’s office market has continued to perform but with no Grade A space remaining and a rapidly diminishing supply, the need for new high-grade office development has become more acute than ever, according to newly-released figures.
The statistics, collated by the city’s office and investment agents and released by Professional Liverpool this morning, paint a picture of a city of two halves.
First, the positive: Overall take-up in the city centre hit more than 736,000 sq ft last year, increasing by around 52% year-on-year, and up 96% compared with five years ago, marking a record year for deals. Across the city region, take-up hit 867,600 sq ft, again a record performance and an increase of 32% year-on-year.
While the number of deals in the city centre has diminished – only 90 were completed last year, compared with 156 in 2015 – the average size is now much larger at an average of nearly 6,500 sq ft, rising from 4,000 sq ft a year earlier.
Although the figures have undoubtedly been boosted by the 270,000 sq ft letting of the India Buildings by HMRC, it still shows there is a demand for space within the city, now increasingly driven by life sciences, co-working operators, and professional services, particularly legal.
But looking beyond refurbished and older stock, the figures also reveal a lack of immediate supply which may yet scupper large occupier demands within the city’s business core.
There have been no new-build offices completed in the city centre since St Paul’s Square completed in 2011, and this lack of supply is starting to tell: of the 716,000 sq ft available in the city, only 336,000 sq ft is ready for immediate occupation, and none of this is Grade A, the highest office specification.
Speaking at a launch event for the Commercial Market Review this morning, Tony Reeves, chief executive of Liverpool City Council said there was a “clear picture of a mismatch between supply and demand”.
“We want to create thousands more knowledge-intensive jobs in the city centre and in that context we need the supply to be there. There is a real lack of commercial investment and if we don’t get it right we will miss a massive commercial opportunity”, he said.
Reeves pledged to work with a wider range of developers to make this a reality; the council is already working alongside Kier and CTP to bring forward a potential 400,000 sq ft of commercial space at Pall Mall, but Reeves reiterated the council would do more to widen the net.
“There is a perception that the council has worked with a small number of developers and won’t work with out-of-town partners. We want to make sure we will work in a very balanced way across the whole market, with a consistent approach so developers will get a fair go.
“It’s about working in partnership, not the council getting in the way, but supporting the right type of development.”
One of the areas highlighted where the council will partner with developers was at the Knowledge Quarter Gateway, where a masterplan is currently being put together by Avison Young, K2 Architects and Planit-IE for the 56-acre site around Lime Street Station. Here, Reeves said this approach had been taken so development would be “significant rather than site-by-site”.
“There is a significant opportunity for commercial growth at the KQ Gateway; the council won’t just be looking at the highest land values,” he said.
The lack of supply has put the lid on major deals with only 3% of the total deals amounting to over 20,000 sq ft, on par with last year. A major deal with Sony taking around 50,000 sq ft at the redeveloped Echo Building is expected to complete in the first quarter, but aside from this, large-scale lettings in the city have been few and far between.
However, according to Andrew Byrne of CBRE, the lack of supply has had further impacts, including helping to stabilise rents, and encouraging landlords to invest in existing assets.
“New-build offices are starting to stack up financially with good-quality Grade B stock now commanding rents of between £17/sq ft and £21/sq ft,” he said.
Grade A headline rents for new build now stand at £25/sq ft, making developing speculatively a possibility, albeit an unlikely one.
“It’s becoming increasingly difficult to convert existing space into good-quality offices and with two major growth areas in co-working, and health and life sciences, making an impact, it’s vital for more development to come forward,” added Byrne.
“The message from occupiers is that it can’t just be a nice space, it needs to offer more”.
Supply does look like it will remain limited this year, with the city’s two key Grade A developments, making progress but neither are due to complete in 2019.
A planning application for the first phase of Pall Mall, featuring the first of several office blocks, is being progressed although word of a judicial review into remediating the existing Bixteth Gardens may have an impact.
Elsewhere, Peel’s William Jessup House, which has had outline planning permission for around 100,000 sq ft since 2013, is now progressing to reserved matters, with sources suggesting the approach to the building will be similar to Tomorrow in Salford’s MediaCity. However, the building is unlikely to developed on a speculative basis.
Word of major requirements floating around in the market is relatively muted, although Taylor Wessing is actively searching for space for more than 100 staff, and Reeves confirmed the council was talking to developers about a “major new legal company” taking space in the city, although declined to name specifics.
According to the city’s office agents, much of the rental market is driven by churn, rather than new occupiers coming in, with even some of the major lettings coming from elsewhere within the city region. Some firms would be encouraged to move to higher-grade office space if available, but with no Grade A space on the market, this looks unlikely within the next six months.
Others, however, have called for more investment from the city council to enable developments to come forward. While Liverpool has backed Pall Mall by funding the site’s remediation, talk of the council taking a pre-let on some of the space has been discussed to give the scheme a boost before it breaks ground.
Whether that will be necessary is another question, but the statistics are clear: without the space, Liverpool looks less likely to attract the jobs it needs to thrive.
The statistics on Liverpool’s office market were collated by Professional Liverpool with input from CBRE, Avison Young, Matthews & Goodman, Mason Partners, Colliers, Hitchcock Wright, Worthington Owen, Keppie Massie, Mason Owen, and Eddisons.
Expert view: Andrew Scott, partner, Mason Owen
Vacancy rates are low in the Liverpool. Whilst this screams positivity on one level, there is a lack of supply of Grade A offices in the city centre. To find a space of more than 10,000 sq ft is hard, to find a high-quality office in the city centre at that upper echelon is near impossible.
The Liverpool office market today, as over the last twenty years, has been driven mainly by churn from within the city region – so we certainly need to up our game in terms of offering in order to attract the quality businesses that we want to see relocating to Liverpool and stem the “brain drain” from our Universities.
Prime office rents in Liverpool are £20/sq ft which is significantly below other Northern cities and requirements are out there with HQs considering relocation regionally but, the city needs the right offer to attract them. Recent sales including One Derby Square, 101 Old Hall Street, Royal Liver Building, 4 St Paul’s Square and Atlantic Pavilion illustrate investor demand for office buildings with attractive yield profiles compared to other regional cities.
Smart landlords and investors are refurbishing their offices – into inspiring, contemporary and highly serviced spaces. It will serve us all well to further assist talent attraction and retention.
There is no doubt a cautiousness created by the day-to-day drama of Brexit, but these can obscure a reasonable long-term view. The impact is likely to be short lived – we have survived financial blips before. There is high demand regionally, spurred on by keen interest rates, sustained economic growth and a healthy market, so there is certainly no reason to stall.
Liverpool has grown to become a top European city in which to live. Opportunities to work in the city need to catch up.