The Subplot | Office market green shoots, spring frosts, Cheshire

Welcome to The Subplot, your regular slice of commentary on the North West business and property market from Place North West’s analysis editor, David Thame.

THIS WEEK

  • Frost risk: confidence in the North West office market is rising with the sap, but a cold snap could hold back speculative development outside city centres
  • Elevator pitch: your weekly run-down of who and what is going up, and who is heading the other way

Subplot Sponsors Logo 2022 (1)

GREEN SHOOTS MEET SPRING FROSTS

Tender or hardy?

April is famously the cruellest month, but March might give it a run for its money this year. Is the office market about to feel some late frosts just as the tender shoots of recovery emerge?

The sun has been out (briefly), the streets are busier, the cold mornings aren’t as cold as they were. The cycle of life has taken a turn. In the property market, too, the sap is flowing. HBD and its funding partner Greater Manchester Pension Fund have enough of it to launch a £66m speculative office scheme at Manchester’s Island site, John Dalton Street. Work on the 100,000 sq ft block begins more or less immediately. Given that the world is poised between a global pandemic and the first European war for 70 years, this looks like the definition of March madness. Is it?

We’re fine

Not madness at all. The usual data sets have been scrambled by Covid, so things like five-year averages for supply and demand are not much of a guide. Meanwhile, HBD thinks it is offering an unusually different product that will not compete directly with much of the ostensible competition.

The calculation

“During the pandemic we completely reviewed the product and made some changes, reengineering the whole building to be net zero carbon. That has taken time and significant additional cost, near to 15% additional cost in this case. So a significant cost and something we have taken the decision to absorb as a business,” HBD executive director Adam Brady tells Subplot. The calculation is that this is a sufficiently different – and appealing – product that it can escape the gravity of today’s market numbers.

The figures

For the record, Manchester city centre take-up is about 30% down on where it was pre-pandemic (although recovering) at the same time as the supply pipeline is fairly stable. Deloitte’s Crane Survey said 1.34 million sq ft of office floor space is currently under construction across 12 schemes (with 744,000 sq ft due to land this year). A large slice of the 1.2m sq ft delivered in 2021 remains unoccupied but 54% of the office floor space set to complete in 2022 and 30% set to complete in 2023 is already pre-let. Not at all bad, although there’s still some work to do.

Different product, different market

Brady thinks the Island site will provide the kind of excitement and quality others cannot match, and attract tenants even if Manchester’s occupier requirements shrink by 10-20% over the medium-term (which it might). The city’s appeal is undimmed, Brady thinks, because the city’s talent pool is too good for office occupiers to ignore. “There was standing room only on my train in Manchester today,” he says. Spring is in the air.

Beyond the city centre?

The spring-time confidence has not, so far, reached far beyond sheltered city centre hotspots. As Brady explains, the talent-pull to Manchester isn’t anything like so powerful elsewhere. “This mood feels more localised to city centres where office occupiers are chasing a talent pool that hasn’t fundamentally changed. Elsewhere I don’t see, for instance, masses of people looking at places like Chester or starting speculative offices there.”

Colder the further you go

In Chester they see things in much the same way. Katrina Kerr is chair of Chester BID and by no means gloomy over the city’s prospects. She says there are some encouraging straws in the wind, including The Armstrong Partnership’s 12,000 sq ft refurbishment of the Old Post Office, and deals at the 250,000 sq ft HQ Chester building. But the big game-changing deal or development that would nudge rents up high enough to make speculative development viable is nowhere in sight.

Hopes for the warm weather

“We have options, but nothing has happened yet, and we’ve sites with consent where nothing has happened, and the hope is we see more offices as part of mixed development,” says Kerr. “The University of Chester’s plans to link its north and south campuses via a ribbon of sites in the central area would mean absorption of city centre space, and that would shift the market around a bit,” she says. But that is for the future.

Commuter belt mildness

The Cheshire commuter belt towns have seen more activity, but don’t be misled into thinking it’s a sign that confidence in speculative development has returned, warns Canning O’Neill’s James Dickinson. “There’s really no speculative building, unless you count 15,000 sq ft in in Holmes Chapel built as a condition to a residential scheme. Everything else that looks like speculative development either has someone behind it, like Stockport Council at 2 Stockport Exchange, or was a pre-let like Cheadle Royal and Booths Park Knutsford,” says Dickinson. Of course a load of pre-lets is not bad news – the opposite – and maybe because of them developers don’t feel the need to take speculative risk. But the lack of spec is interesting all the same.

And getting milder

There are, of course, some significant refurbishments along with repurposing of former retail floorspace (a big shout out to Glenbrook’s Stok in Stockport and Bruntwood’s Rackham’s rethink in Altrincham). But Dickinson reports a chill in the air. “The market is only prepared to take a limited risk, and rents don’t quite justify that outside the city centre although maybe we’re reaching the tipping point with figures like £27.50/sq ft at Towers Didsbury. That kind of rent is the point where speculative development makes sense.” So, signs of spring, but not yet the fully open daffodil.

Watch the weather

The frost risks are, however, real. The massive inflationary shock of rising fuel prices could do plenty of damage to the economy and hence the property market. There’s really very little government can do to mitigate the pain. A modest economic slowdown is more or less a certainty, and analysts are talking hesitantly about stagflation. The inflation risk shouldn’t be over-stated – a lot of the oomph will drop out of the figures later this spring as last year’s unusual price movements work their way through. But it is not a scenario that can be discounted.

The North West office market is not as tender a plant as that in some regions and cities, but it is tender all the same. Chills are not welcome.


The Subplot Elevator Pitch 07.12.21ELEVATOR PITCH

Going up, or going down? This week’s movers

It’s a week of two halves. The office market feels the g-force, but the Liverpool co-living scene endures a nasty sinking feeling. Let’s hope the brakes are working.

The battle for talent

An interesting sidelight on the North West office market comes from Manchester-based recruitment consultancy Calibre Search. The firm specialises in the construction and property sector and has been raking it in, with 2022 turnover expected to hit £6.6m, about £2m up on 2020. Demand for staff in some recruitment specialisms is off the scale, says director Pete Gillick.

“White collar consultancy – architects, structural and civil engineers – there’s a real skills shortage. You can blame the big warehouse developments as well as HS2,” he says.

As a result the firm is moving from The Landmark building on the Northern Quarter’s Turner Street to a new suite at 9 Stevenson Square. Although floorspace isn’t growing much – from 1,200 sq ft to 1,460 sq ft – the headcount will, zooming up from eight to 14, then on to 20. Like many office occupiers, density is growing. “It’s better managed space,” says Gillick. “The rent is up maybe 20% but this is a building I always wanted to be in.”

The battle for talent appears to be raging unabated. Meanwhile, office occupiers have some strong well-developed views on what they want, right down to individual buildings. This is going to be the new normal.

Liverpool co-living

Liverpool City Council has, at length, agreed a holding position on co-living (see Subplot, 13 January 2022) and it’s a moot point whether it is as bad, or worse, than it might have been for the nascent co-living sector. You can read it here. Flatlets (served by common facilities) must meet the national minimum standard of 37 sq m, which is not much of a surprise, and, like other local authorities, Liverpool worries about the potential for alternative uses if co-living flops. There must also be some kind of off-site affordable housing provision (the council recognises that doing affordable co-living is going to be tricky). So far so good, many developers will be able to live with that, despite grumbles.

The troubles come with the council’s desire to see more family homes, rather than one-bed flats, and to encourage stable and not-transient communities. That means a big frown for leases under six months and an insistence that co-living schemes include a mix of apartment sizes – which slightly voids the point of co-living.

The crunch comes with a clause reminiscent of Manchester’s approach which insists co-living can only be justified if there are jobs likely to depend on it. “Developers will need to demonstrate that future tenants can easily access employment opportunities in the city and should present a clear rationale and need, based around the contribution of the proposal to the local economy, responding to the specific needs of employers and supporting jobs,” it says. This could cut out all but a handful of the larger, hipper and better-resourced schemes. We shall see.

Get in touch with David Thame: david.thame@placenorthwest.co.uk | 01544 262127

The Subplot is brought to you in association with Oppidan Life.

Subplot Sponsors Logo 2022 (1)

Your Comments

Read our comments policy

Related Articles

Sign up to receive the Place Daily Briefing

Join more than 12,000 property professionals and receive your free daily round-up of built environment news direct to your inbox

Subscribe

Join more than 12,000 property professionals and sign up to receive your free daily round-up of built environment news direct to your inbox.

By subscribing, you are agreeing to our Terms & Conditions and Privacy Policy

Name*
Would you also like to receive our free PlaceTech Weekly newsletter, covering innovation in property?*