It's that time of year again – annual reviews of the year gone and previews of the year ahead. Getting quickly into the spirit are the good folk at DTZ in Manchester. Ken Bishop, Caroline Baker, John Keyes and colleagues share their thoughts on 2011 and predictions for next year.
Ken Bishop, senior director of DTZ's office agency in Manchester, on the outlook for office development in Manchester: "As 2011 has seen the start of only one speculative office development in the North West – No 1 St Peter's Square in Manchester – it would not take much for 2012 to deliver an improvement. However, given the reality of the global economy, its impact on the property market and the general lack of finance, it is hard to foresee a significant increase. The majority of new development will have to be pre-let in part to enable the developer to finance the remaining, speculative, element. The lease from Salford Council on the Embankment is an example of the type of creative solution needed to enable development to proceed.
"The irony of course is that the lack of competition should give developers a stronger hand than they have had for some time. In theory this will drive rental growth and/or decrease the level of incentives for occupiers. Another consequence of the lack of new supply is that we will almost certainly see the return of pre-lettings, something that has been absent from the market for about five years. The first pre-let within this development cycle has just been achieved with KPMG taking part of Argent/GMPVF's No 1 St Peter's Square.
"We may also see more major refurbishments. Merepark has commenced work on The Department, the former Lewis's department store in Liverpool, which will provide 80,000 sq ft and work is taking place on Waterhouse, formerly 41 Spring Gardens, Manchester, which offers around 16,000 sq ft.
"In general, 2012 is likely to be similar to 2011, though perhaps with more positive prospects for the future."
John Keyes, director of corporate real estate consulting, offers his perspective on public sector property: "This year was supposed to be the year when the public sector responded to funding cuts, changed the way it delivered services and rationalised its property occupation. In practice, progress has been much slower than hoped for. Political opposition – for example to health sector reforms and to the re-organisation of university education – has created uncertainty and a 'wait and see approach' in many organisations. Inevitably, public bodies have spent time looking inwards, focusing on the implications of the cuts and managing internal reorganisations, rather than on the bigger questions of transforming service delivery and making property portfolios suitable for the new funding and policy environment.
"Expectations remain that property rationalisation can make a significant contribution to the delivery of savings. So, will 2012 be a year of delivery? The evidence is that many organisations are still looking inwards, something that could be compounded as they look at making further cuts, given the year-on-year nature of funding reductions within the spending round. In many cases, there is also the dilemma of accessing resources and expertise to effectively deliver change. Organisations may have lost some of their most senior and experienced people through redundancies. They face a challenging agenda of making radical service and organisational changes. The expertise often exists in the private sector, but justifying budgets for external consultancy support is a challenge in a climate of redundancy and service closure.
"Notwithstanding these challenges, 2012 will need to be a year when the property efficiency agenda starts to deliver. We need to see the emergence of some pioneering organisations that grasp the new agenda and show others the way."
Caroline Baker, development consulting director, on 2011 and the year ahead for local authorities in the North West: "2011 has been one of the most difficult years on record for local authorities, set within the context of ongoing fiscal crisis at a regional, national and Europe-wide level, resulting in limited development in the North of England in particular. Significant cuts in public sector spending have resulted in many local authority officers being made redundant including some very experienced people whose local knowledge is invaluable. This has been compounded by significant changes, and in the interim uncertainly, in the planning policy framework and other legislation. New-sub regional organisations in the form of the LEPs are beginning to influence their areas but it is only now that they are starting to get some power and money to make a difference.
"So at the close of 2011 we have greater clarity and one thing is for certain – the Government is not going to prescribe actions and is looking to local areas to come up with their own solutions!
"In 2012 local authorities will need to become more proactive if they want to see development happening outside of the region's prime locations. They will need to consider carefully how they can best use their resources – land, borrowing potential, funding mechanisms such as the Community Infrastructure Levy and experience – to collaborate with the banks, investors and developers as well as public sector partners in order to respond to the challenges and, importantly, opportunities in their areas. The old development models are no longer working and new flexible models must be developed for specific opportunities. Local authorities need to determine which their priority projects are and how they can collaborate with partners to deliver then going forward."
Gino D'Anna, associate director of DTZ's professional advisory services team, on the situation for corporate occupiers in the North West in 2011 and into 2012: "Despite the current economic uncertainty and fragile consumer confidence arising from the eurozone debt crisis, we expect 2012 to see the opportunities for occupiers to take advantage of recent market conditions and trade up to new superior premises, or renegotiate preferential terms on their existing premises, to become more difficult in several markets throughout the North West.
"For example, in the industrial and logistics sector DTZ research reveals that after a surge of activity in Q3, there currently remain only four buildings in the North West region able to satisfy occupier requirements in excess of 150,000 sq ft.
"Some 2m sq ft of industrial space was let in Q3. This means that of all the available space in the region only 7.5% of the supply is of Grade A quality. This is the second lowest proportion in the UK, positioning the North West behind Wales, and supports our view that tenant-friendly terms on new industrial units will be harder to negotiate as we progress through 2012. Accordingly we also predict that of all the main UK markets, the Manchester industrial market will see the highest rental growth for the period 2011-15, predicted at 2.5% a year.
"Similar sentiments are replicated in the central Manchester Grade A office market with little or no new developments expected to come online throughout 2012."
Russell Hefferan, associate director of valuation for DTZ in Manchester, on the outlook for banks: "2011 is panning out to be another tough year in the commercial property market, with some sectors holding up better than others. Typically rental levels have remained flat and there has been a softening of yields on secondary and tertiary stock over the latter part of 2011 in response to increased economic uncertainty. The retail sector continues to suffer the most as consumer confidence remains weak, retail sales have declined and the number of void units generally remains high in weaker locations. The lack of speculative development in the industrial and office sectors has helped to maintain rental levels, offsetting the limited level of demand from tenants.
"Banks continue to take a very cautious approach on short-term income and vacant accommodation. However, there has been increased activity from lenders for well secured investments due to the emergence of new entrants, such as Virgin Money and insurance companies such as Legal and General, Aviva and Canada Life increasing their lending appetite. Mezzanine finance providers have provided further options for borrowers on prime stock.
"With continued weak occupier markets, rising unemployment and further global uncertainty we would expect the yield gap between prime and anything else to continue to widen in 2012. Prime rents are likely to remain flat with potential further falls in secondary and tertiary markets in retail, office and industrial. We expect supermarkets, medical centres and data centres to continue to outperform the rest of the market in 2012."
Tony O'Keefe, director of industrial and logistics, on North West predictions for 2012: "In the forthcoming Olympic year, the winner's podium separates the best from the 'also rans' and as in athletics this stark contrast in fortunes will be played out in the industrial market throughout 2012.
"Gold – As the supply of Grade A accommodation is at historic lows, 'oven ready' prime industrial sites will capitalise from a reinvigorated design and build market. For example UK Coal's Cutacre site near Bolton, 212 acres, will establish itself as the North West location of choice and dominate big shed take-up in the Manchester hinterland over the coming years, with other sites such as National Grid's Voltage Park in Partington, 67 acres, also benefiting.
"Silver – Better quality second hand space will capitalise on Grade A shortages as the supply imbalance forces occupiers to compromise their requirements and consider buildings throughout the quality strata. Occupier incentives and rents are expected to harden for better quality accommodation.
"Bronze – As continued economic uncertainty prevails, exacerbated by the European malaise, occupational demand will be muted and there will be an increasing polarisation in the market place between prime and non-prime accommodation."