Fears Manchester office market facing drought with no schemes due to start
Property experts have warned of a ‘pinch point’ for Grade A office supply in Manchester following analysis of the region’s commercial scene.
The Knight Frank data shows that, while demand for office space in Manchester is higher than pre-Covid levels, no new commercial buildings are starting on site.
Manchester also registered the highest year-on-year rental growth of the regional cities at 13%, reaching £45 in the second quarter of 2024. The prime rent has risen by 20% since the onset of the pandemic.
David Porter, head of Knight Frank’s Manchester office, said: “There’s no schemes due to commence in Manchester city centre. By the middle of next year everything will be complete.
“Even if a developer did get onsite in the next month or so it would be 2027 before anything reached completion.
“So, we are expecting a pinch point in Grade A office supply over the next few years.”
David Porter
He added: “As a result, we are seeing pro-active landlords, such as Bruntwood, beginning high quality refurbishment projects which will fill that gap.
“These will tick a lot of boxes for occupiers wanting to meet their environmental sustainability pledges and satisfy this continued flight/demand for high quality space.”
And he believes that commercial growth and residential growth in cities are intrinsically linked.
He said: “The increased demand for city centre living is linked to economic growth of the city. If the lack of high quality office space has a negative effect in how businesses can physically grow their operations, this could slow the demand for residential space.
“Developers’ dilemma is intrinsically linked to price of debt and the rise in construction costs. This has a knock-on effect to an asset’s investment value as we have seen investment yields move out from the previous prime rate of sub five per cent.”
“But there is still good levels of occupier demand out there. Both from existing companies wanting to significantly increase their floor space to cater for growth and new occupiers coming to the region or city for the first time. The North West is still a highly desirable location for lots of reasons.
“So with this squeeze in supply and demand I think we will see the return of the traditional pre-let where companies with lease events in 3-4 years will sign a contract before work begins so they can secure the best space they can in line with their requirements.”
He also predicted that rents will increase further to bridge the viability gap: “We are already seeing prime rents at £45 per sq ft per annum exclusive (psf/pax) and will see that reaching £50 psf/pax and beyond over the next 12 months.
“One consideration would involve local authorities stepping in, similar to the Greater Manchester Residential Fund, which has helped drive housing in the city but for commercial projects. This would certainly assist in the wider urban regeneration.
“The office is not dead – it very much continues to thrive.”
Key takes from the latest data include:
Manchester registered improved occupier activity in H1 2024, with take-up reaching 504,885 sq ft. This total is 29% ahead of H1 2023 and is 14% above the five-year H1 average.
Underpinning demand was the professional services sector, which accounted for more than half of all space leased across 36 deals.
Of this, serviced office providers represented 46% of total professional services take-up.
In line with this, the largest letting to complete involved serviced offices firm Cubo, which took nearly 60,000 sq ft at WeWork’s former home of No.1 Spinningfields.
Alongside Bristol and Sheffield, Manchester registered the highest year-on-year rental growth of the regional cities at 13%, reaching £45 in Q2 2024. The prime rent has risen by 20% since the onset of the pandemic.
City centre Grade A availability stood at 712,231 sq ft at the end of H1 2024, reflecting an annual increase of 29%. This total is eight per cent above the five-year average for Manchester.
Following the completion of Havelock and 4 Angel Square, the Grade A vacancy rate rose from 3.1% in H1 2023 to four per cent in H1 2024. However, with the entirety of 4 Angel Square currently under offer, once legally completed this will reduce the vacancy rate to 2.9%.
As of the mid-year point, 584,109 sq ft of office stock was under construction in Manchester’s city centre. Of this, c.105,500 sq ft was let and c.276,000 sq ft was under offer, leaving c.203,000 sq ft, or 35% of space, available. Development is spread across four schemes, all of which are new build and are due to be delivered within the next 12 months. Beyond this, there are no significant developments under construction.
Investment volumes were modest in H1 2024, reaching £44.3m, eight per cent below the equivalent period in 2023.
The largest deal to transact involved Trinity Bridge House, which was purchased by a private investor for an undisclosed sum.
Prime office yields held firm at 6.75%, reflecting an outward shift of 100 bps year-on-year and 175 bps since the onset of the pandemic.
