Welcome to The Subplot, your regular slice of commentary on the North West business and property market from Place North West.
- Banking on success: Liverpool is to get the Grade A office stock it has so long aspired to, but can the maths add up?
- Bad karma: 18 years of trouble at Manchester’s pioneer skyscraper
LIVERPOOL’S GRADE A OPPORTUNITY
Kinrise bank on Martins
Liverpool is about to get the Grade A speculative office agents have been clamouring for, thanks to Kinrise’s plans for the 210,000 sq ft Martins Bank building. It’s a huge test of the market. Will it pass?
Last week Kinrise, the investor-landlord founded by Sam and Harry Lawson Johnston and George Aberdeen, bought Liverpool’s 210,000 sq ft Martins Bank building from a subsidiary of US giant Starwood Capital. The deal was off a guide price of £16m (though they likely paid a good deal less). Following the pattern established in Manchester – where they transformed Canada House, Oxford Street, and a cluster of buildings around Albert Square – they plan to bring a mix of hybrid workspace to the Water Street block. It is a massive gamble.
The idea for Martins Bank is that various kinds of spaces – from studios to big suites, including some flex-style desks – will cater to the various image-conscious elements of the Liverpool market. Whatever the occupiers’ size, there will be something to suit them. Lease length will vary from a month on license to 20-years plus. “We are not creating a giant coworking space,” says Sam Lawson Johnston, in the process killing one popular rumour about their plans. About 10% of floorspace will have a flex/coworking flavour. Kinrise faces two big risks: that the refurbishment sums don’t add up, and that the office market can’t support the product.
The biggest gamble is over whether there will be an office market to meet the new-look Martins Bank building when it lands in 2023/4. The annual Liverpool Office Market Review for 2020 finally emerged, months late, at the end of May 2021, and it confirmed reports that last year was dire. In the commercial heart of the city take-up plunged by almost 60% to 142,000 sq ft. This was a uniquely bad performance, compared with a roughly 25% fall in the out-of-town market. Take-up in the central business district was entirely in Grade B and B* stock and was invariably in very small deals, with an average size of 1,900 sq ft. This is not comforting for developers with 210,000 sq ft to fill.
Do professionals like funky?
There’s no sign (yet) of anyone publishing a half-year update on the Liverpool office market, but we can be fairly sure that if they did it would not change the picture dramatically. The public sector is now a tiny fraction of the market (12%), culture and media hover around 14% and the dominant group is professionals (56%) suggesting the Liverpool market has narrowed. In some ways, it looks like it did 20 years ago, minus the public sector, which isn’t terribly good news. Not much joy for Kinrise here.
The maths at Martins Bank will be challenging. “We aren’t yet sure, but its clear refurbishment is going to come to a very large sum if we replace air conditioning, lifts and everything else you need to make it Grade A,” says Lawson Johnston. This will be the city’s first speculative Grade A scheme for some time. Kinrise has to push rents up sharply if they are to make the Martins plan work. This might not be easy. The top rent today is a squeak over £28/sq ft, and Subplot‘s earthy scepticism that tenants are, in reality, paying anything like as much was treated with cold scorn by locals. By 2023/4 the world could look very different, but even so, projecting rents up into the early £30s is still a bold move in a market where demand rarely sizzles.
On the other hand
Lawson Johnston quotes some numbers which give him comfort. “The central Liverpool office market has lost something like 2m sq ft of floorspace in the last five years – space that has been converted to residential or hotels or just vanished. So the supply-demand balance for really great space is much tighter.”
Creating a market
The gamble Kinrise is taking is as much on Manchester as it is for Liverpool, because the Kinrise hope is that at least some of the larger Manchester-focused occupiers will see Martins as competitively priced. “There’s very little high-quality characterful space on offer in Liverpool,” Lawson Johnston says of the city market. He adds: “There’s also a good rationale for relocation because talent is available in Liverpool, and with Martins they will be in the characterful building that’s missing, so it will be a really good option for occupiers looking at other cities.” But there’s no doubt, this is about creating a market as much as it is about responding to one that already exists.
And then the obvious
Repurposing historic buildings is tricky. Repurposing big, super-solid examples like Martins Bank (built in 1927-33 of Portland stone on a steel frame) is even harder. This one has defied redevelopment since Barclays pulled out in 2009. Castlewood Property promoted a hotel conversion in 2014, and it is a tribute to the viability problems the building posed that they proposed adding more rooms in 2015. Neither plan came to anything, and Castlewood sold in 2016. Starwood bought Martins that year, resurrecting the hotel plan in 2019. But it evidently decided to give up the game, as the sale to Kinrise suggests.
Done this before
“Everything in old buildings is complicated: they fight back. Fortunately, we are used to that in our Manchester buildings,” says Lawson Johnston. The saving grace at Martins is that converting an office building into another better office building is inherently less complicated than converting it into a hotel (think plumbing, for a start). The next stage will be to assemble a professional team, with the aim of submitting a planning application in the first quarter of 2022. Work on site will begin as soon as possible with completion by mid-2024.
Issues to address
Agents have lots of questions, including: will this be phased? Will it all be speculative? And, will it really add up? Ian Steele, principal at Avison Young, says: “There is nothing much to give developers comfort in the 2020 take-up figures, particularly if they want larger deals. Of course, it is hard to say what the market will be like in 2023/24, and we know there are some lease events coming up that could provide big deals, but we also know that some of those occupiers who we anticipate being in the market in 2023/24 are now signing re-gears on existing leases.”
Conclusion: A bold market test. If it works, everyone will say it was obvious.
IN CASE YOU MISSED IT…
The Beetham curse
Beetham Tower, Manchester’s first serious skyscraper, has been sold for a nominal sum. Ground Rents Income Fund has, along the way, offloaded an expensive requirement to rectify problems including replacing 1,400 windows over 47-storeys. The deal comes after several years of upset and legal wrangling. As far back as 2014 work began on urgent repairs, which progressed until chosen contractor, Carillion, collapsed in January 2018. In truth the curse goes back much further.
Beetham Tower, designed by SimpsonHaugh, and built by the Liverpool-based Beetham Organization, was way ahead of its time. The idea of sitting hotels on top of residential, or vice versa, was an untried novelty in 2006 when the tower was completed. And, of course, skyscrapers were as scarce as hen’s teeth back in 2003 when the idea first surfaced.
This has never been a happy project. The paint was scarcely dry when residents of what were then the city’s most expensive apartments complained that they didn’t have priority access to Hilton Hotel facilities. Complaints have ranged from the high-pitched howl produced by the metal fin on the roof to more recent upsets focussing on rowdy lockdown parties.
In the meantime, structural problems turned into a financial headache: when Carillion collapsed the £2.9m repair bill defaulted to the landlord. Various efforts to escape the obligation were blocked by the courts. Behind the cladding problem, the distracting howling noise, the collapse of contractors, and the disappointed investors, sat the family business that created it, the Beetham Organization.
Who is Beetham?
Founded in the 1980s by Hugh Frost, and owned by Frost and his sons, the business pioneered skyscraper development in the Noughties, riding a rapidly (and, as it turned out, dangerously) rising economy to do so. It was a case of towering ambition, including a change of name from Frost to Beetham for son Stephen, a prominently displayed coat of arms (still on the website), a lot of chat about family history and family dynasties, and the slightly Bond villain “Organization” name, spelled the American way. Back then Subplot came away from interviews with father and son feeling this was about a lot more than square feet: The Independent’s Paul Vallely seems to have had a similar experience.
A jealous god
The story goes that the Beetham name is wrapped up in family history, history which also embraces the extremist Plymouth Brethren from which Frost senior apostatised. His decision to turn his back on the sect appears to have been traumatic. If the religious element in family history is significant, the Frost/Beethams will be familiar with the Book of Genesis story of the Tower of Babel. Building up to the clouds did not end well for the people of the land of Shinar, and nor did it go well for the Beethams. The business unwound in a series of traumatic public revelations in the wake of the Great Financial Crash.
And then it fell apart
In 2010 plans for a skyscraper at Blackfriars got into trouble after the collapse of backing from Mirax, a company associated with controversial Russian developer Sergei Polonsky (Google him). In 2011 the core Beetham business, now named Regional Landmark Hotels, along with its parent, hit trouble with Anglo-Irish Bank loans. That meant Ireland’s “bad bank” – the National Asset Management Agency – got involved, and they tended not to take prisoners. The outlook was now bleak. By 2012, weighed down by an £89m debt obligation, the last of the major assets were being wound up by administrators. The Beetham Organization, still exists (in a new formation) and is still controlled by Stephen Beetham. Companies House searches reveals nothing much has happened since its 2011 registration.
Conclusion: That the curse of the Beethams is still rumbling on, decades later, is either bad luck or bad karma.
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