Lack of Grade A office space in central Manchester drives occupiers to ‘enlarge city centre’

The ongoing lack of available Grade A office schemes in central Manchester is driving demand for accommodation at the edge of the city, according to the latest research by real estate advisors Colliers International.

The global firm’s snapshot of the Manchester office scene in the second quarter of 2018 showed less than 400,000 sq ft of Grade A space under construction and about 210,000 sq ft of ready-to-occupy space across the whole of the city centre.

Strong leasing activity of recent years has caused this depletion of available stock in the city core with developers unable to provide a supply of new space fast enough to accommodate rising demand from regional, national and international businesses.

Occupiers with a pressing requirement for office space are, therefore, having to consider refurbished and existing accommodation in areas previously regarded as ‘fringe’ such as First Street, Oxford Road and Irwell Corridors and Ancoats – effectively expanding the city centre on all quarters to accommodate need.

Those businesses intent on occupying a central location must wait until late 2019 for completion of major schemes, such as Landmark, St Peter’s Square, 123 Deansgate and 11 York Street.

A consequence of this scenario is the creation of a healthy pre-let market with occupiers taking space ahead of completion of schemes, and in some cases before they have even started, to secure their desired location.

Peter Gallagher, director, national offices at the Manchester office of Colliers International, said: “Manchester city centre has been ready to push out its boundaries for a while to include districts previously regarded as ‘fringe’ or ‘edge of city’ as domestic and international occupiers compete to secure space and share in the increasingly global success story that is Manchester.

“Those occupiers determined to be in the civic core are left with no choice other than to seek pre-lets as they wait for completion of substantial developments.”

The 2150,000 sq ft of ready-to-occupy space in central and edge of city Manchester is spread across the central business district of Spinningfields where 9,400 sq ft at 3 Hardman Street and 39,728 sq ft at 3 Hardman Square remains available, and another 70,542 sq ft at 101 Embankment.

In the second quarter of 2018, the Manchester office market saw 327,035 sq ft taken up in 76 deals, taking the total for the first half of the year to 769,118 sq ft, significantly up on the same period for 2017 and including a record first three months.

Keynote transactions of the first half saw GPU commit to 157,000 sq ft at Two New Bailey, Irwin Mitchell take 33,300 sq ft at 1 St Peters Square, On The Beach take 34,000 sq ft at AeroWorks, and WSP confirm it was taking 54,000 sq ft at No 8 First Street.

The increasingly competitive demand for space in Manchester has caused an inevitable increase in rent with headline rents hitting £35 per sq ft, a figure of £36 per sq ft being the asking price for available space at Spinningfields and Colliers’ forecasting £40 per sq ft by 2030.

Peter added that the lack of Grade A stock had encourage occupiers to consider Grade B accommodation, thereby putting upward pressure on secondary rents which rose by 10% year-on-year to an average of £27 per sq ft.

The largest investment in quarter two of 2018 was the £31.5m acquisition of the Zenith building by Bet365 at a net initial yield of 5.25% with another substantial transaction being the £20.5m sale of Manchester Green to Squarestone Growth.

An absence of medium-to-long-term secure income saw investors acquire vacant properties at almost prime rack rented yields, shown by Royal London’s purchase of 3 Hardman Square at a net initial yield of 4.10%, increasing to 5% when fully let.

Peter explained: “Prime yields in Manchester are currently the lowest in the UK regional cities at 4.50%. As a result of continued occupational and investor demand and sustained rental growth, we believe that those yields can see further downward pressure, while capital values rise further.”