Separated markets

2011 has so far seen the Manchester city centre office market form a classic two tier division defined by a lack of large grade A accommodation in contrast to the smaller end of the scale, which has seen a variety of refurbished office buildings competing within a much larger pool of competition. Fuelled by a stagnant development pipeline, the disparity between the two markets is expected to continue into 2012/13 resulting in grade A space diminishing further as a result. A possible relief for this market is the small proportion of large grade B refurbishments which, if completed successfully, may attract tenants that had previously focussed on just grade A stock.

Changing lanes
In terms of take-up, the Manchester City Centre office market remained remarkably resilient throughout 2010 with strong levels of take-up recorded at 1.3 m sq ft (39 percent above the long-term average) despite difficult economic challenges. Even taking into account the Co-operative Group pre-letting of 330,000 sq ft, this was an impressive performance particularly given the lack of public sector office take up which accounted for over 300,000 sq ft of transactions in 2009.

The legal sector was a main driver of the 2010 market with DWF Solicitors acquisition of No 1 Scott Place totalling 82,995 sq ft at Spinningfields, 31,011 sq ft to Barlow Lyde Gilbert at Chancery Place and 31,344 sq ft to HBJ Gateley Wareing at Ship Canal House following the Halliwells break up.

Other significant transactions included acquisitions by MMC group at Belvedere (39,482 sq ft), Late Rooms at Peninsula (35,372 sq ft) and Co-operative financial services at the Arndale Tower (31,178 sq ft).

Dwindling supplies
While 2011 has had a more muted start to the year in the context of historic take up levels, Savills predicts year end take-up to reach in the region of 800,000 sq ft with a number of significant requirements currently in the market. Most notably, these include KPMG, Pannone LLP and Lloyds Banking who all have outstanding requirements.

Inevitably, the impact of this sustained requirement on the current city centre office market is a diminishing supply of large grade A space, which has already started to apply upward pressure on prime rents. Savills expects Manchester’s current headline rent of £28.50 per sq ft to increase to circa £30 per sq ft during the course of 2011, accompanied by a continued reduction in rent free periods.

A further predicted consequence of the lack of larger grade A stock is an increase in the refurbishment of secondary office space. This stock is also expected to benefit from larger transactions until speculative development returns to the market. However, speculative development finance remains exceptionally scarce and the development pipeline consequently remains muted for the foreseeable future.

Developers continue to look towards larger requirements such as those of Lloyds and KPMG to drive a pre-let in order to bring forward a major scheme such as St Peters Square or a further development at Spinningfields. Piccadilly Place and 3 Hardman Square are currently the largest significant available opportunities in the city, which means that a lack of grade A accommodation is likely to restrict the market for several years to come.

Upward pressure
In contrast to the lack of larger grade A floorplates coming to the market during the next few months, the extensive availability of grade B refurbished stock continues to generate exceptional competition between landlords. The result is persistent downward strain on rents along with upward pressure on rental incentives.  However, this negative impact on rental growth is predicted to temper and level out throughout 2011 as the lack of grade A space forces some tenants to reconsider their requirement options.

Looking forward, while the Public Sector is forecast to see a nine percent decline, Oxford Economics predict that the financial and business services sector will continue to out perform and will see employment growth of 17 percent in Manchester over the next five years. As a city that is regarded as a more attractive location for private enterprise to locate to than some other northern towns and cities, Manchester is consequently expected to see a return to pre-recession employment levels by 2013, two years sooner than the rest of the region. The positive mood is further enhanced by figures released by the Office for National Statistics from the Inter-departmental Business Register which shows that the number of businesses in Greater Manchester has risen by 22.3 percent between 2009 and 2010 in comparison to a fall of 0.2 percent in the number of businesses in 2009.