JLL: Sublet office supply may dampen Manchester market
A glut of office space forecast to come back on the market due to shrinking occupiers could pose serious threats to the city's market, according to Jones Lang LaSalle.
Trevor Sloan, head of Jones Lang LaSalle's national office agency team in Manchester, said: "Whilst we have witnessed a number of major businesses in the UK offloading surplus office space as the recession begins to bite; this has yet to translate itself into significant tenant-led office supply in Manchester. So far the so called 'grey space' which has become available in the city has been a trickle, as opposed to a flood."
Jones Lang LaSalle said that in the first six months of 2009, grade B office supply in Manchester city centre increased by 14% which has continued to inflate vacancy rates. Much of this space was returned to the market by landlords, rather than tenants, as plans to refurbish or redevelop second-hand stock were put on hold. As yet there has not been an influx of occupier controlled 'grey space'; the majority of space released by tenants so far was expected.
He continued: "Over the last four years a number of Manchester based occupiers have felt confident to make the jump into good quality, consolidated office space in order to accommodate their longer term growth plans.
"To facilitate their future business expansion, but ensure the availability of good quality stock, some of these tenants, for example BDO Stoy Hayward, Halliwells and Cobbetts, always intended subletting some space, and have now placed this surplus accommodation onto the market."
Jones Lang LaSalle expects an increasing number of office occupiers to return both surplus Grade B, as well as good quality Grade A space back on to the market over the next 12 months.
The volume of this 'grey space' will influence the severity of the decline in market conditions and could place additional pressure on office rents, as tenants looking to sublet their surplus space, will be forced to drop their quoting rents to offload space from their balance sheets and save on costs.
Sloan added: "Office occupiers will continue to review how they can occupy their space efficiently and the decision of whether to market or mothball excess space is crucial. For those occupiers wishing to sublet or assign space they need to be pragmatic about what accommodation to release and how best to bring it to the market. That pragmatism is becoming very apparent with highly competitive incentives softening headline rents, for example a 20,000 sq ft building on a 15-year term will have a rent free of approximately three years. This is not the time for occupiers to be inflexible about how to dispose."
He continued: "On the flipside, we expect a significant increase in take-up volumes during the second half of 2009, however, with circa 300,000 sq ft of Grade A space in legal hands at the moment in the city. As a result, it is likely that there will be a return to limited Grade A Supply conditions in Q3 2010; which will lead to a stabilising of rents and reduction in levels of incentives and landlords will be able to become more 'choosy'."
He concluded: "The window of opportunity for those occupiers seeking large floorplates in top quality Grade A space is already narrowing, with the choice in the best city centre schemes is already limited; only 50,000 sq ft remains available at 3 Hardman Street and several floors are now under offer at Belvedere. For those occupiers considering office moves in the short term will be forced to look soon at the remaining large floorplates or begin discussions with developers about long term design and build opportunities."
