Gradual gains

At the start of the year there was general concern that the office market would grind to a halt and the number of transactions fall dramatically. Potential hurdles included the emergency budget and the general election, which served to inject uncertainty into all UK markets and consequently limit the amount of occupational demand active in the market.
The early predictions for 2010 have proved to be overly pessimistic and the office market has continued to witness pockets of activity. As we enter the closing stages of the year, the total take-up figures will confirm that activity has fallen by a modest 20 percent compared to the long-term average. The statistics do, however, mask a number of trends. The amount of active demand from the public sector has, inevitably, fallen and the continued expansion of the professional services sector in Birmingham has stalled.

The diverse nature of demand in Birmingham has insulated the market from individual sector decline and around 100 separate office deals will complete during the year. The average transaction during the first half of 2010 involved a suite of around 4,500 sq ft typically accommodating 30 to 40 employees. The majority of active enquiries confirm consolidation as the key driver of demand, however, organisations with imminent lease events, such as a lease expiry or break clause, are frequently taking the opportunity to relocate to better quality accommodation on extremely competitive terms.

Against the backdrop of steady take-up, the absence of any speculative development has resulted in a gradual decline in overall supply. The availability of new, or extensively refurbished, space in the market currently exceeds 700,000 sq ft, which is expected to meet demand over the next two to three years. After this time there is a growing possibility that there will be a shortage of supply as we enter 2014. Organisations with lease expiries or breaks over the next two to four years should be mindful of the predicted supply and demand dynamics and the impact, this will have on terms obtainable and the choice open to decision-makers.

The challenge for the wider market must be to find alternative uses for the unrefurbished secondary and tertiary space where there is very little demand. The generous terms available on good quality space mean that cost savings achieved by occupying older, unrefurbished accommodation are now so modest that the substantial majority of occupiers are choosing to relocate into better quality space. This trend indicates that many of the 1960s buildings, for example, could remain empty unless an aggressive management approach is adopted.

After the uncertainty of 2009 there is growing evidence in the market confirming that headline rents achievable for various sectors of the market have stabilised. Overall, headline rents have fallen by approximately 20 percent from their peak in mid-2008.

Yet there are signs that as supply falls there will be a gradual improvement in rents as we enter 2011 and a corresponding fall in achievable incentives as the supply in the market returns to the long- term average.

The Birmingham office market generally faces a number of challenges at any given time; however, the largest influence on activity during 2011 is likely to be business confidence. As we enter 2011, the consolidation trend is expected to continue and business mergers are also likely to generate demand in the professional services, banking and insurance sectors.