High cost Aberdeen

The development of over one million sq ft of office space in Aberdeen this year will alleviate the increasing shortage of good quality offices and underpin rental growth, claims Knight Frank in its annual Aberdeen Office Market Activity Report launched recently.

The escalating problem of demand outstripping supply has led to an unprecedented level of development including, for the first time in many years, a number of speculative schemes in the city and surrounding areas.
Key completions this year in the city centre will be augmented by a number of office developments in the pipeline such as New Horizons House at the harbour, Phase 1 of Rockwater at Stoneywood Park, Dyce and Stockland Halladale Muir’s HQ building at Aberdeen Gateway Business Park, Cove, which will undoubtedly help to ease demand for prime Grade A office space.

In light of the strength of demand from office occupiers, Aberdeen’s commercial property market performed strongly during 2007 and Knight Frank projections indicate a prosperous year ahead, with prime office rents predicted to reach £28 per sq ft for new developments.

The success of Aberdeen’s commercial property sector has been supported by stable economic growth in 2007 with the Aberdeen City and Shire region totalling a 2.5 percent increase, even despite economists’ exclusion of the significant contribution of the oil industry, slightly behind the national average of 3.1 percent. Current forecasts for 2008 indicate total output growth will be a robust 2.0 percent and more in line with projected UK growth of 2.2 percent. The report indicates that business services and other (largely private) services will be key growth sectors for the region during 2008, with growth of 5.5 percent and 5.3 percent respectively, with projected growth of 4.0 percent in the banking & insurance sector.

Aberdeen’s investment market witnessed a surge of investment transactions in the first half of 2007 but slowed during the end of the year following the impact on investment activity associated with the global squeeze in the credit markets. However, compared with other markets such as London and the South East, Aberdeen enjoyed record levels of rental growth in 2007 due to positive developments in the oil industry.

Highlights of the report include:

Economic output in Aberdeen is projected to increase by 2.0 per cent in 2008, in line with the UK and driven principally by growth in the business services and banking and insurance sectors

High and rising oil prices have impacted positively on the Aberdeen office market and increased take-up in 2007 and an unprecedented level of development activity is underway

Prime office rents currently stand at £24.50 per sq ft, having increased by an impressive 14 percent during 2007, while quoting rents on new developments are as high as £28.00 per sq ft.

With over one million sq ft in the pipeline and the completion of a number of Grade A speculative developments expected this year, the problem of lack of good quality supply is being addressed and should underpin rental growth.

The strong occupational market, linked to the strength in the oil industry, has protected Aberdeen somewhat from the wider downturn in investment activity, with transactions reflecting covenant strength and long lease terms.

Katherine Monro, Partner, Knight Frank Aberdeen said: “The lack of Grade A supply which has been a notable feature of Aberdeen’s office market in recent years will be addressed by the completion of a significant amount of speculative space over the coming 12 to 18 months.

“The realisation of schemes in the pipeline, particularly in the city centre, will help meet strong unsatisfied demand for quality space helping to underpin rental growth which has been particularly strong in central Aberdeen over the last two years.”

Claire Higgins, Head of Commercial Research, Knight Frank said: “The Aberdeen Office Market Activity Report clearly demonstrates the positive rental growth already achieved by the city during 2007. In fact, last year Aberdeen witnessed a higher increase in prime rents than any other key UK regional market. Projections for the year ahead highlight further scope for market growth and continued demand for new Grade A office stock.”