Prospects remain bright for the office sector

Prospects remain bright for the office sector, despite a decline in output over the first quarter of this year. The take-up of office space in various locations around the UK has remained strong despite the stagnating economy, and Glenigan continue to expect growth in project starts over the next eighteen months.

The office sector is in a period of recovery following a traumatic post-credit crunch slump in building. The market has improved – especially in prime locations – as demand has firmed. However, the continuing economic weakness is still a big drag on the sector, and prospects are tied to the wider health of the business community.

The value of new construction output, as recorded by the Office for National Statistics (ONS), fell by 1% in the first quarter of 2012 compared to a year ago. This came after the sector had seen three consecutive quarters of growth over 2011, in what was a year of stabilisation following a tough three years.

Despite this recent drop in output, Glenigan remain confident that this is only a temporary blip. We have tracked an increase in the value of office projects starts during the past twelve months, and improving market conditions around the UK cement the expectation for a recovery.

Chart: Value of New Office Construction Output

Many of the new projects which started recently were concentrated around London and the South of England. Over 2009, London accounted for 26% of the underlying value of project starts. By 2011 this had risen to 45%, while projects which accounted for more than half of all the value of office builds starting this year were situated in the capital.

Demand for office space seems to have improved recently. Looking at London again, take-up increased in May to 811,000 sq ft according to CBRE. Though this is below the long-term average, it does point to an improving market. In addition, space under offer in May rose to 2.37 million sq ft – well above the long-term average. Dan Roberts, Executive Director at CBRE, commented “We expect the healthy levels of active demand and upcoming lease events to drive take-up in the coming months”.

This performance has been echoed in different locations around the UK. In the first quarter of 2012, Glasgow saw the highest level of take-up since the second quarter of 2010. Edinburgh also saw an increase over the same period, and take-up is now 31% above the long-term average, while the CBRE reported that Aberdeen was their “best performing regional city”.

Further south, Leeds saw one of its strongest quarters of take-up, according to CBRE. Despite a drop in transactions last quarter, Manchester has also seen a healthy office market. However, other cities – noticeably Birmingham – have been hit harder by underlying economic weakness